issue-1996-01-31•Federal Register final rules — 1996-01-31
Federal Register final rules — 1996-01-31
issue-1996-01-31Federal Register final rules — 1996-01-31Regulation
Published Federal Register documents, not public-inspection drafts. The GPO XML/text rendition is a research aid; the linked complete official PDF retains the printed layout and all graphics. Graphics are retained in that PDF and are not independently reproduced in this text rendition. Publication does not establish that every provision remains legally in force.
FR Doc. X96-10131 Small Business Investment Companies
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3177-3189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X96-10131]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 107
Small Business Investment Companies
AGENCY: Small Business Administration.
ACTION: Final rule.
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SUMMARY: This final rule revises the regulations found at 13 CFR Part
107, governing the Small Business Investment Company (SBIC) Program. It
eliminates inconsistencies, clarifies procedures, accommodates program
experience and industry changes, and provides for more efficient
program operation. It also clarifies and shortens regulations where
appropriate, eliminates redundant provisions, consolidates and
reorganizes sections and clarifies ambiguous language.
EFFECTIVE DATE: This final rule is effective January 31, 1996.
FOR FURTHER INFORMATION CONTACT:
Leonard Fagan, Office of Investment; telephone no. (202) 205-6510.
SUPPLEMENTARY INFORMATION: In response to a Memorandum from President
Clinton for all federal agencies to simplify their regulations, SBA
published a proposed rule on November 28, 1995, to revise the
regulations governing the SBIC program. See 60 FR 58530 (November 28,
1995). The public was afforded a thirty-day period in which to submit
comments on the proposed rule to SBA. During that period, SBA received
over 30 letters containing over 200 comments. After giving careful
consideration to the comments and concerns raised in those letters, SBA
is today finalizing the proposed rule with certain modifications
discussed below. Only those sections which have changed, which were
commented on or which
[[Page 3178]]
need some clarification will be discussed.
In accordance with 5 U.S.C. 553(d)(3), SBA has determined that good
cause exists to make this rule effective upon publication. Ample notice
of material changes has been given the interested public through
proposed rules published in the Federal Register inviting public
comment and through distribution of draft rules before publication of
the proposed rules. All comments received from the interested public
have been carefully considered. Representatives of the entities
affected by this rule concur with an immediate effective date. Almost
all regulatory changes will relieve restrictions or merely reorganize
and simplify text. To the extent there are substantive changes
contained in these rules, SBA believes no prejudice will occur to
affected entities by making the rules immediately effective. The
affected entities will have had an adequate opportunity to take any
necessary steps to be in compliance with the rules by the effective
date, but to the extent that may not be the case, any instance of non-
compliance with a changed regulatory provision during the first 30 days
after publication will be treated with such liberality as may be needed
to avoid prejudice. New fees imposed through these rules will not be
enforced until at least 30 days after publication.
General Comments
Those comment letters which addressed the proposed renumbering,
reorganization and rewrite of Part 107 were overwhelmingly
complimentary. Some felt the proposed regulations were a vast
improvement over the old, while others commended SBA on its efforts to
simplify and streamline the regulations. Most agreed that the
reorganization and stylistic revisions will make Part 107 easier to
follow and understand. As one commenter stated, ``Practicality and
common sense really pervade these new proposals.''
Part I
1. Subpart A--Introduction to Part 107
SBA agrees with the comment received on proposed Sec. 107.20,
suggesting that it is unnecessary to specifically mention Section
301(d) Licensees when discussing the fact that all Licensees must
comply with all applicable regulations. The section has been revised
and finalized accordingly.
2. Subpart B--Definition of Terms Used in Part 107
a. ``Associate''
(1) Several commenters suggested that the proposed language
defining ``any person regularly serving a Licensee in the capacity of
attorney at law'' as an Associate was ambiguous and could be construed
too broadly. SBA agrees and will return to the language in the current
definition which states that an Associate includes ``any Person
regularly serving a Licensee on retainer in the capacity of attorney at
law''. The definition is finalized accordingly.
b. ``Control''
The proposed definition of ``Control'' has been adopted with a
change suggested by one commenter. In the proposed rule, Control could
be achieved through possession of the ``power to veto'' the direction
of the management and policies of a concern; in the final rule, the
reference to veto power is deleted. The commenter's concern was that
this phrase could be interpreted so broadly as to prohibit normal
covenants necessary to protect a Licensee's investments. This was not
SBA's intention; furthermore the Agency believes that its concerns
about negative Control of Small Businesses are sufficiently addressed
by the reference in the definition to ``indirect'' Control, as well as
by the ``presumption of Control'' provisions under Sec. 107.865(b).
c. ``Control Person''
Under the existing regulations, a Person with at least a 40 percent
limited partnership interest in a Licensee's general partner is a
Control Person. Paragraph (4) of the proposed definition would apply
the same criterion to a limited partner in the Licensee itself. One
commenter objected to the entire concept of classifying a limited
partner as a Control Person, suggesting that the provision contradicts
established partnership principles and could threaten a limited
partner's limited liability status. SBA does not believe that a
regulatory definition would have this effect; furthermore, the Agency
has stated previously that the definition of Control Person is intended
to cover persons in a position to exercise influence, but not
necessarily control, over a Licensee. Nevertheless, in response to the
concern expressed, SBA has increased the ownership percentage required
to classify a limited partner (of either a Licensee or its general
partner) as a Control Person from 40 percent to 50 percent.
d. ``Disadvantaged Businesses''
SBA received one comment objecting to the proposed language
requiring that a Disadvantaged Business be managed ``on a day to day
basis'' by persons who meet the criteria for social or economic
disadvantage. The commenter considered this phrase an unwarranted
expansion of the definition. SBA disagrees; the requirement that
disadvantaged owners be actively involved in the management of their
companies reflects long-standing SBA policy and is consistent with the
Agency's statutory mandate for all of its programs for Disadvantaged
Businesses. Accordingly, the definition is finalized as proposed.
e. ``Equity Capital Investment''
SBA received one comment suggesting that ``a preferred stock
investment with the liquidating dividend payable to the extent of
available assets'' should be considered an Equity Capital Investment.
SBA's interpretation of the Small Business Investment Act of 1958, as
amended (``Act'') is that dividends may be payable only to the extent
of retained earnings; this treatment is consistent with the statutory
language concerning subordinated debt instruments, which can qualify as
Equity Capital Investments if, among other things, they ``provide for
interest payments contingent upon and limited to the extent of
earnings.'' Accordingly, the definition is finalized without change.
f. ``Institutional Investor''
In the proposed rule, SBA added language to the definition of
``Institutional Investor'' to clarify that an entity cannot satisfy the
net worth test on the basis of unfunded commitments from its investors.
One commenter suggested that this language be dropped and that such
commitments be recognized. SBA disagrees with this suggestion because
it increases the government's financial risk. SBA has protections in
place which allow it to require Institutional Investors to fund their
commitments to a Licensee under certain circumstances; however, it is
unlikely that such requirements could be extended to investors who are
one or more levels removed from the Licensee. Therefore, the proposed
definition is adopted as final.
g. ``Start-Up Financing''
The proposed rule did not make any changes in this definition, but
used it in a new context--it was proposed that Licensees be permitted
to take temporary Control of Start-Up Financing under Sec. 107.865(d).
In this context,
[[Page 3179]]
several commenters felt that the definition was too narrow in terms of
the types of businesses covered, the length of time the business had
been in existence, and the exclusion of businesses formed to acquire
existing businesses. SBA agrees that a broader definition is
appropriate for purposes of Sec. 107.865 and is not objectionable for
purposes of determining Capital Impairment, the other context in which
it appears. Accordingly, the final rule largely eliminates these
restrictions. A business formed as an acquisition company can qualify
as long as the acquired company meets the criteria for a Start-Up
Financing.
The limitations on sales revenue and cash flow have also been
modified: Under paragraph (3) of the proposed definition, companies
could not have ``sales exceeding $5,000,000 or positive cash flow in
any fiscal year.'' The final rule prohibits ``sales exceeding
$3,000,000 or positive cash flow from operations in any of the past
three fiscal years.'' SBA believes the lower sales ceiling is more
appropriate to a true start-up company; the other changes respond to
comments received.
h. ``Unrealized Appreciation''
The proposed definition is adopted with one minor editorial change.
i. ``Unrealized Depreciation''
The proposed definition is adopted with one minor editorial change.
j. ``Qualified Non-Private Funds''
The proposed definition, which appears in Sec. 107.230(d), is
adopted without change. SBA received one comment objecting to the
language that permits government grants to nonprofit entities to be
Qualified Non-Private Funds ``if SBA determines that such funds have
taken on a private character and the nonprofit corporation or
institution is not a mere conduit.'' SBA believes the language is an
appropriate interpretation of the Act; in particular, the ``private
character'' standard is specifically cited in the legislative history.
3. Subpart C--Qualifying for an SBIC License
a. Organizing a Licensee
Comments received on proposed Sec. 107.100 and Sec. 107.110
questioned why Section 301(c) and Section 301(d) Licensees could not be
formed as limited liability companies. Limited liability companies are
not a permitted form of organization recognized by the Act. Therefore,
the rule is adopted as proposed.
b. 1940 Act and 1980 Act Companies
SBA received several comments on proposed Sec. 107.115, all of
which objected to the restriction against licensing 1940 Act or 1980
Act companies that elect to be taxed as regulated investment companies
under section 851 of the Internal Revenue Code. SBA is persuaded that
Licensees would not be denied the ability to access capital by using
these structures. Therefore, the final rule allows Licensees to
organize as or convert to 1940 Act or 1980 Act Companies, and to elect
to be taxed as regulated investment companies. The regulation also
clarifies that when the tax code conflicts with SBA regulations or
guidelines governing distributions, the SBA requirements will apply
unless the Licensee requests and receives a waiver in accordance with
the regulations.
c. SBA Approval of Initial Management Expenses
Proposed Sec. 107.140, which requires all new SBIC license
applicants (not just applicants planning to issue Participating
Securities) to obtain SBA approval of their initial Management
Expenses, is adopted with one change: This section will not apply to
non-leveraged Licensees, which present no financial risk to the Agency.
d. Management and Ownership Diversity
Proposed Sec. 107.150, which requires all license applicants
planning to obtain Leverage to have diversity between management and
ownership, is adopted without change. SBA received one comment that
applicants should be permitted in all cases to satisfy the diversity
requirement on a ``look through basis'' (that is, at the parent level).
This option is available to Licensees if SBA approves; however, as
stated in the preamble to the proposed rule, the Agency believes it
must have discretion in this area in order to assure that a Licensee
has genuine diversity, as opposed to an ownership structure that
provides ``technical'' diversity but does not satisfy the intent of the
regulation.
e. Special Rules for Partnership Licensees
Proposed Sec. 107.160(b), allowing an Entity General Partner to be
organized for the sole purpose of serving as the general partner of one
or more licensees, is adopted without change. SBA considered the
comment suggesting that an Entity General Partner not be precluded from
other activities, but rejected the suggestion due to the complexity of
examining a general partner involved in both SBA and non-SBA related
activities. The Agency believes that this would result in an undue
burden both on its examiners and on the Entity General Partner.
f. Minimum Capital Requirements for Licensees
SBA received one comment on proposed Sec. 107.210(b) (which did not
contain any substantive changes) suggesting that the Regulatory Capital
requirement for Section 301(d) Licensees be inclusive, not exclusive
of, unfunded commitments. This comment is inconsistent with SBA's
interpretation of the minimum capital requirements of the Act;
therefore, the proposed rule has been adopted as final without change.
g. Special Minimum Capital Requirements for Licensees Issuing Leverage
A comment received on proposed Sec. 107.220(b) argued in favor of
omitting the ``special'' minimum capital requirements which require any
company licensed after the regulation is finalized to have Regulatory
Capital of at least $5,000,000 in order to apply for Debentures, unless
it demonstrates to SBA's satisfaction that it can be financially viable
over the long term with a lower amount. The same commenter also
suggested revising the ``grandfather'' provisions in Sec. 107220(c)(1),
which allow certain existing Licensees that do not meet the current
minimum capital requirements to receive additional Leverage if they are
profitable. The commenter wrote that other criteria besides
profitability should be considered.
SBA is finalizing both provisions as proposed. The Agency considers
these standards to be vital to the continuing success of the SBIC
program. As stated in the preamble to the proposed rule, a review of
the financial performance of Licensees supports the conclusion that
higher levels of Regulatory Capital significantly reduces the
likelihood of unprofitable operations over the long term. As to
Sec. 107.220(c), the profitability criterion has been used since 1990,
and SBA continues to believe that profitability is the best and most
objective indicator of future successful operations.
SBA has made two editorial changes to proposed Sec. 107.220(c)(2).
Proposed paragraph (c)(2)(i), which deals with Debentures maturing
before December 31, 1995, has been deleted because it is not longer
applicable. Proposed paragraph (c)(2)(ii) has been incorporated into
paragraph (c)(2) and revised by replacing ``a term of three years''
with ``a term to be determined by
[[Page 3180]]
SBA.'' This change has been made because three-year Leverage is not
routinely available at this time.
h. Limitations on Accepting Non-Cash Capital Contributions
The heading of proposed Sec. 107.240 has been revised to read
``Limitations on including non-cash capital contributions in Private
Capital'', which is more consistent with the substance of the section.
One commenter suggested that the section be revised to state that
Licensees may still accept non-cash assets that cannot be included in
Private Capital. SBA did not adopt this suggestion, primarily because
of its concerns about liabilities that may be associated with
unapproved non-cash assets. Therefore, except for the change in the
section heading, proposed Sec. 107.240 is finalized without change.
i. Issuance of Stock Options by Licensees
SBA agrees with the comment that proposed Sec. 107.250(a), which
states that a Licensee may issue stock options, is unnecessary and has
deleted it in the final rule. The deletion does not affect a Licensee's
ability to issue stock options.
j. License Application Form & Fee
A comment received on proposed Sec. 107.300 objected to the
increase in the license fee for partnerships that plan to issue
participating securities, particularly those using the standard
partnership agreement annex already approved by SBA. SBA proposed the
fee increase in order to reflect the Agency's costs of processing
applications. Pursuant to applicable statutory provisions, the
Administration has taken into consideration direct and indirect costs
to SBA of necessary services performed, value to the recipients, the
public policy interest served and other pertinent factors involved.
After due consideration, SBA believes the increase in fees to be
justified and is finalizing Sec. 107.300 as proposed.
4. Subpart D--Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
a. Changes in Control/SBA Prior Approval
Section 107.410 requires SBA's prior approval for a change of
Control while Sec. 107.440 sets out the standards governing SBA's
approval. One commenter suggested that a grandfather clause be adopted
for these sections. The effect of such a clause would be to allow an
existing Licensee to undergo a change of Control without having to meet
the increased minimum capital requirements currently in effect. SBA
believes that a grandfather clause is not necessary because the Agency
will apply the capital adequacy and financial viability standards of
Secs. 107.200 and 107.220 in evaluating an application for a change of
Control. Therefore, both sections are finalized without change.
b. Restrictions on Common Control or Ownership of Two (or More)
Licensees
SBA agrees with the comment that Sec. 107.460, which requires SBA
approval of common Control or ownership of two or more Licensees,
should not be applicable to unleveraged Licensees, so long as none of
the Licensees involved has any Leverage. This change has been
incorporated in the final rule.
5. Subpart E--Managing the Operations of a Licensee
a. Identification as a Licensee
SBA received one comment which argued the difficulty of identifying
an SBIC as a Federal Licensee on each Financing document. SBA agrees,
and has decided to revise proposed Sec. 107.501 to state that before
extending Financing or collecting an application fee from a Small
Business, a Licensee must obtain a written statement from the concern
acknowledging its awareness that it is dealing with a Federally
licensed SBIC.
b. Licensee's Adoption of an Approved Valuation Policy
Many comments on proposed Sec. 107.503(c) objected to the language
which sated that ``SBA reserves the right to review or independently
establish valuations of your Loans and Investments''. All the
commenters agreed that SBA should only become involved in a specific
valuation if that valuation is in violation of the agreed upon
valuation policy. The proposed language was intended to address SBA's
continuing concerns regarding certain instances of egregious non-
compliance with agreed-upon valuation policies, and the difficulties it
has encountered in its attempts to take action regarding such non-
compliance. However, in recognition of the legitimate concerns of
Licensees, SBA is revising Sec. 107.503. In the final rule, the
language cited at the beginning of this paragraph has been replaced by
the following: ``If SBA reasonably believes that your valuations,
individually or in the aggregate, are materially misstated, it reserves
the right to require you to engage, at your expense, an independent
third party, acceptable to SBA, to substantiate the valuations.''
In addition, purposed Sec. 107.503(d)(4) has been revised by adding
the word ``adverse'' before the word ``change'', so that only material
adverse changes in valuations must be reported quarterly to SBA.
c. SBA Approval of Licensee's Investment Adviser/Manager
SBA agrees with the comment on proposed Sec. 107.510 that annual
approval of the management contract by the Licensee's board of
directors is unnecessary. The proposed rule has been revised and is
finalized accordingly.
d. Restrictions on Investments of Idle Funds by Leveraged Licensees
With one change, proposed Sec. 107.530 regarding idle funds is
adopted as proposed. The section has been amended to permit Licensees
to maintain a reasonable petty cash fund.
e. Limitations on Secured Third-Party Debt
As discussed in the preamble to the proposed rule, proposed
Sec. 107.550(a) was intended primarily as a restatement of the existing
regulation requiring leveraged Licensees to obtain SBA approval before
incurring secured third-party debt. The only change was the requirement
that Licensees also obtain SBA approval before expanding the scope of a
security interest or lien associated with existing debt. Based on some
of the comments received, SBA realized that paragraph (a) was being
misinterpreted. In particular, it was not SBA's intention to require
approval each time a Licensee wants to draw down an approved line of
credit. Nor did SBA intend to require Licensees to obtain approval to
substitute one asset or group of assets for another as the subject of a
security interest, as long as the values are comparable. In the final
rule, proposed Sec. 107.550(a) has been split into two paragraphs and
revised to clarify the intent.
Two comments were received on proposed Sec. 107.550(c), suggesting
that the limitation of the security interest to 125 percent of a
proposed borrowing against a Licensee's investor commitments is
impractical. SBA recognizes that some Licensees may not be able to
borrow under this provision. However, it is only with reluctance that
the Agency has permitted any third-party borrowing against investor
commitments, since these are the same commitments that SBA may look to
at some point to protect its own financial interests. Therefore, SBA is
finalizing this provision (renumbered as Sec. 107.550(d)) without
change.
[[Page 3181]]
Proposed Sec. 107.550(d) stated the conditions under which SBA will
provide a 30-day turnaround on applications for approval of secured
third-party debt. One of these conditions was that the security
interest be limited to the assets acquired with the borrowed funds, or
an asset coverage ratio of no more than 1.25:1. SBA agrees with the
commenters who suggested that the coverage ratio is unrealistically
low, and is revising the ratio to 2:1 in the final rule (with this
paragraph renumbered as Sec. 107.550(e)).
f. Subordination of SBA's Creditor Position
Proposed Sec. 107.560 is adopted without change. One commenter
argued that without a specific definition of subordination, expressed
in a formal subordination agreement, Licensees would find it impossible
to obtain third-party debt. SBA's experience with the subordination
regulation, which was first adopted in 1991, is that lenders have been
willing to work out the details of subordination agreements with SBA on
an individual basis. Nevertheless, SBA is sympathetic to Licensees'
desire to understand the Agency's specific concerns in this area, and
will attempt to develop guidelines for a subordination agreement that
would be generally acceptable to SBA.
g. Activity Requirement
SBA received several comments on proposed Sec. 107.590 suggesting
that the activity test is unnecessary, or should be revised, or should
not apply to non-leveraged Licensees.
SBA strongly believes that some form of activity test is necessary
for both leveraged and non-leveraged Licensees. Companies are licensed
with the understanding that they will help to fulfill the public
purpose of the program, which is to further the growth and development
of small businesses. Clearly, an inactive Licensee is not contributing
to this goal. Furthermore, an inactive Licensee, even if it is non-
leveraged, imposes some degree of administrative burden on SBA.
In response to the comments concerning the specific structure of
the activity requirements, SBA has made a number of changes intended to
make the test more practical and to modify provisions that were subject
to interpretation. In the proposed rule, the basic activity test (in
Sec. 107.590(a)) required a Licensee to satisfy two criteria dealing
with investment activity and percentage of assets maintained as idle
funds. In the final rule, a Licensee must satisfy only one of the
criteria to be considered active.
In paragraph (b)(1), the proposed rule stated that certain
``recent'' cash inflows would be disregarded in determining whether a
Licensee is active. In the final rule, ``recent'' has been replaced by
a specific time period (within nine months of the Licensee's fiscal
year end).
In paragraph (b)(3), under the proposed rule, one of the criteria
for an exception to the activity requirements was that a Licensee have
``no remaining unfunded commitments from investors''. SBA agrees with
the commenter who suggested that this standard was too narrow, and has
revised the provision to include Licensees with unfunded commitments
equal to no more than 20 percent of their Regulatory Capital.
Finally, in Sec. 107.590(d), SBA has added a phase-in period for
new Licensees, recognizing that the activity test is not relevant to
those companies that have been in operation for less than 18 months.
6. Subpart F--Recordkeeping, Reporting, and Examination Requirements
for Licensees
a. Information Required From Portfolio Concerns
With some minor changes, Sec. 107.620 is adopted as proposed. SBA
is not adopting the suggestion of one commenter that paragraphs (a) and
(b), which require Licensees to obtain certain information from Small
Businesses before extending Financing and on a periodic basis
thereafter, should not apply to non-leveraged Licensees. Although one
of the aims of these paragraphs is to mitigate SBA's financial risk,
they are also intended to insure that Licensees are operating in a
manner consistent with the goals of the Act. SBA agrees with the
comment that paragraph (b)(2), which requires that the information
submitted to the Licensee be certified by the chief financial officer,
general partner, or proprietor of the Portfolio Concern, should be
expanded to permit certification by the chief executive officer,
President, or Treasurer. The section is finalized accordingly.
b. Requirements for Licensees To File Annual Financial Statements
Except as hereafter noted, SBA adopts as final proposed
Sec. 107.630, which deals with the requirements for filing annual
financial statements with SBA. Based on comments received, SBA has
added language to Sec. 107.630(a) clarifying that the portion of SBA
Form 468 containing economic information on the Licensee's portfolio
companies may be filed up to two months later than the remainder of the
form; this reflects SBA's current policy. In Sec. 107.630(b), a cross
reference to Sec. 107.1220 has been added to clarify the reporting
requirements for Licensees with outstanding Leverage commitments.
One commenter suggested that the ``economic impact'' information
required by proposed Sec. 107.630(e) places an unfair burden on the
Licensee. SBA is finalizing this paragraph as proposed; the information
requirement is not new, having been in effect since April 25, 1994, and
Sec. 107.630(e) is actually worded more narrowly than the current
regulation that it replaces. While SBA considers the economic impact
information to be vitally important to the mission and future of the
SBIC program, the Agency recognizes that this information is not always
easy to obtain. SBA has generally accepted Licensees' good faith
efforts to provide the required data and will continue to do so to the
extent possible.
Proposed Sec. 107.630(a)(2) would have required a Licensee's
independent public accountant to carry errors and omissions insurance
in an amount acceptable to SBA, or be self-insured and have net worth
acceptable to SBA. This proposal elicited comment from representatives
of the accounting profession who objected to SBA's attempt to create a
``deep pocket'' for recovery of damages, as well as concern from a few
other commenters that the amount of insurance required be more clearly
defined. SBA is sensitive to concerns that this requirement may prevent
many smaller, but highly competent, practitioners from performing SBIC
audits; however, the Agency also must consider its need to control
financial risk. Furthermore, SBA feels that the ability of a firm to
obtain some amount of insurance can be, in itself, a useful indicator
of professional standing. After careful consideration of the issue, SBA
is finalizing Sec. 107.630(a)(2) to require the independent public
accountant to have errors and omissions insurance of at least
$1,000,000, or to be self-insured and have a net worth of at least
$1,000,000, unless SBA approves otherwise. This wording will give SBA
the flexibility to make exceptions for firms that do not meet the
insurance requirement but have strong track records as auditors of
SBICs or similar entities.
c. Changes Not Subject to SBA Prior Approval
Proposed Sec. 107.680 has been finalized with one change. A
commenter suggested that this section, which
[[Page 3182]]
requires SBA's post approval of certain changes in the Licensee's
operations, capitalization, and management, should not apply to non-
leveraged Licensees. SBA does not entirely agree, particularly with
regard to changes that cause Licensee to operate in a different way
than was contemplated at the time it was licensed. However, for
Licensees that have no outstanding Leverage or Earmarked Assets, SBA
believes safety and soundness considerations do not require post
approval of directors and officers (other than the Licensee's chief
operating officer), and that it is sufficient for such Licensees to
notify SBA of any changes.
d. Responsibilities of Licensee During Examination
Proposed Sec. 107.691 included a provision requiring a Licensee and
its independent public accountant to agree that the accountant's
working papers would be made available to SBA upon request for
examination purposes. One commenter stated that this requirement would
not be objectionable if SBA provided assurance that any workpapers
requested would be treated as confidential under the Freedom of
Information Act (FOIA) or similar laws. An accountant's working papers
relating to an individual Licensee are indeed protected from disclosure
under the exemptions available under FOIA. Since these exemptions are
statutory, SBA believes it is unnecessary to restate them in the
regulations, and Sec. 107.691 is finalized as proposed.
e. Examination Fees
SBA received more than ten comments on proposed Sec. 107.692. All
of the comments objected to the increase in the examination fees to be
charged to SBICs. Many stated that the cost of an SBA examination would
far exceed the cost of their annual audit, even though the procedures
involved are more limited. Further, some felt that unleveraged
licensees would bear an unfair portion of the overall fees due to the
fact that the fees are to be assessed on total assets of the Licensee.
Unleveraged (usually bank owned) SBICs tend to have the largest amount
of total assets yet have no federal funds at risk. Therefore, it was
argued that the cost of enforcement should weigh more heavily against
leveraged Licensees.
As stated in the preamble to the proposed rule, the proposed fee
schedule was designed to produce total revenue sufficient to cover the
current direct costs to SBA of conducting examinations. SBA considers
examinations to be a key element in maintaining the integrity of the
SBIC program. However, based on the comments, SBA is persuaded that the
proposed fees were too high in general, and that the increases were
particularly excessive for the largest Licensees. In the final rule,
the examination fees have been lowered significantly, although they
still represent an increase over the current levels.
7. Subpart G--Financing of Small Business by Licensees
a. Ineligible Small Businesses
Under proposed Sec. 107.720 (a) through (i), SBA lists those Small
Businesses which are ineligible for SBIC Financing and certain
exceptions to those restrictions. Except for the revisions discussed
below, this section is finalized as proposed.
SBA received seventeen comments on this proposal. One comment
questioned whether Sec. 107.720 as a whole should be applicable to non-
leveraged Licensees. Another suggested deletion of the prohibition in
Sec. 107.720(a) against financing relenders or reinvestors as this type
of financing could result in jobs and the payment of taxes. Neither of
these comments were adopted because the provisions in question are
mandated by the Act.
b. Passive Businesses
One of the criteria defining a passive business in proposed
Sec. 107.720(b) is that the business ``is not engaged in a regular and
continuous business operation''. The proposed rule goes on to state
that the ``mere receipt of payments * * * such as * * * lease
payments'' would not be considered a regular and continuous business
operation. One commenter asked how this definition would apply with
respect to taxi medallion financing, an industry in which several SBICs
already have millions of dollars invested. It is common practice in
this industry for medallion owners to lease their medallions rather
than employ taxi drivers directly.
SBA's previously-stated position regarding taxi medallion lending
is that Licensees may finance medallion owners who lease the medallions
to others, but only if such owners are actively engaged in day to day
management activities. These include supervision of lessees and
responsibility for vehicle maintenance, insurance, and compliance with
local laws and regulations. Owners who lease their medallions and
receive payments without such active involvement will continue to be
considered passive businesses under the final rule.
Two comments objected to proposed Sec. 107.720(b)(1)(ii), which
would define as passive any companies whose employees are not carrying
on the majority of the day to day operations. The commenters argued
that many businesses use third parties, including independent
contractors and ``leased'' employees, to carry on day to day
operations. SBA recognizes that such arrangements are now common and
are not necessarily an indicator of a passive business. The final rule
has been revised to define a business as passive if ``its employees are
not carrying on the majority of day to day operation, and the company
does not provide effective control and supervision, on a day to day
basis, over persons employed under contract''.
Proposed Sec. 107.720(b)(2) was a restatement of the existing
``holding company'' exception to the passive business rule, under which
Licensees could finance a passive business if it passed through all the
proceeds to a wholly-owned active business. A number of comments
suggested that the provision could allow something less than 100
percent of the proceeds to be passed through without compromising the
intent of the regulations. SBA agrees and has changed the final rule to
require pass-through of ``substantially all'' the proceeds. The
commenters also suggested deletion of the requirement that the active
business be wholly-owned. SBA agrees that this restriction is not
necessary. Instead, the final rule allows the financing of a passive
business ``if, for all Financings extended, it passes substantially all
the proceeds through the same eligible Small Business that is not
passive'' (italic are added). This revision clarifies that a holding
company must pass the Financing proceeds to only one Small Business,
not to multiple businesses or to a series of different businesses if
Financing is extended on more than one occasion.
c. Real Estate Businesses
SBA agrees with a comment which suggested that proposed
Sec. 107.720(c)(2) is too restrictive, in that it prohibits financing
the acquisition of unimproved realty if the business does not intend to
build on the property, even if the business intends to use it for
another legitimate business purpose such as a parking lot for customers
and employees, SBA did not intend to prohibit financing for this
purpose and the final rule has been revised accordingly.
[[Page 3183]]
d. Project Financing
One comment objected to the prohibition against project financing
in proposed Sec. 107.720(d). As stated in the preamble to the proposed
rule, though this prohibition does not appear in the current
regulations, it has been in effect as a matter of policy for more than
ten years. SBA views project financing as essentially short term and
therefore, inconsistent with the Act. SBA considers this prohibition
important and is therefore finalizing the rule without change.
e. Foreign Investments
With one change, proposed Sec. 107.720(g) is adopted as final. The
proposed rule generally would have prohibited financing a Small
Business if more that 40 percent of its employees or tangible assets
were located outside the United States. In response to comments
suggesting that this percentage was too low, SBA has increased the
allowable percentage to 49 percent in the final rule.
f. Conflicts of Interest
SBA received seven comments on proposed Sec. 107.730. The proposed
rule is adopted with changes to meet some of the concerns in the
comment letters. One comment suggesting that the conflict of interest
prohibitions not be applicable to unleveraged Licensees was rejected by
SBA. Such an exception would be inconsistent with the purpose of the
Act.
Two commenters were concerned that proposed Sec. 107.730(a)(2),
which deals with providing Financing to an Associate of another
Licensee, would unduly restrict co-investing. In particular, the
concern was whether the regulation could be construed to mean that if a
Licensee brought an investor group involving another Licensee and its
Associates into one of its investments, it would be prohibited from any
future participation in investments initiated by that investor group.
This interpretation is contrary to SBA's intent, which was to prohibit
quid pro quo financing arrangements that would allow Licensees to
accomplish indirectly what they are not permitted to do directly--
provide Financing to an Associate. SBA does not consider it necessary
to revise paragraph (a)(2) to clarify the intent, since the language is
essentially unchanged from the previous regulations.
Proposed Sec. 107.730(d) set forth provisions governing investments
in the same Small Business by a Licensee and its Associates, either
simultaneously or at different times. In general, Licensees were
required to demonstrate that the terms and conditions of such
investments were fair and equitable to the Licensee. The proposed rule
identified certain categories of Financing with Associates requiring
SBA approval, and others that would be exempt from this requirement.
Two comments suggested that the exemption in paragraph (d)(3)(iv)
should be expended to include all situations where the Licensee is
nonleveraged, regardless of the status of the Associate. SBA believes
the exceptions provided are adequate and is not adopting this
suggestion.
Proposed Sec. 107.730(e)(1) would require a Licensee to obtain
SBA's written approval for an Associate to participate in the
management of a Portfolio Concern if the Associate has an actual or
potential equity interest in the Portfolio Concern that exceeds 3
percent. Comments received suggested that 5 percent is a more generally
accepted standard used by other federal regulatory agencies in similar
circumstances. SBA agrees and is revising the final rule accordingly.
One comment was received urging the elimination of the publication
requirement of proposed Sec. 107.730(g), which requires SBA to publish
notice of exemptions requested under Sec. 107.730. The concern was that
this requirement could slow down Financings, work a hardship on the
Small Business or potentially disclose confidential information to
competitors. Although SBA is sympathetic to these concerns, the
publication requirement is mandated by the Act and cannot be deleted.
g. Overline Limitation
Three comments were received on proposed Sec. 107.740. One
commenter suggested that the ``overline'' limits not be imposed on non-
leveraged Licensees. This exemption has been effective since April 1994
and was included in the proposed rule. The other comments dealt with
paragraph (c), which allows Licenses to compute an ``increased limit''
if they have unrealized gains on Publicly Traded and Marketable
securities. Both commenters advocated a more liberal cure period if a
Licensee has overline violations resulting from a drop in the value of
its securities. Because of the inherent volatility of publicly traded
securities, SBA does not consider it prudent to encourage the use of
the increased limit and is finalizing the proposed rule without change.
h. Change of Ownership
The comments received on proposed Sec. 107.750 addressed the
definitions of ``debt'' (paragraph (c)(2)) and ``equity'' (paragraph
(c)(3)) used in determining whether the Small Business has an
acceptable debt to equity ratio. It was suggested that the definition
of ``debt'' (which, in this section, generally means long-term debt)
specifically exclude any liabilities under a non-compete covenant with
the seller. SBA chose not to add this automatic exclusion because such
covenants are unique to the circumstances of each transaction. It was
also suggested that the definition of ``equity'' should include
subordinated notes payable to the seller. Such notes are specifically
excluded from the definition of debt; to also include them in equity
would further reduce the debt to equity ratio. SBA believes this result
is inconsistent with the intent of the regulation and is finalizing the
section as proposed.
i. Change in Size or Activity of a Portfolio Concern--Affect on
Licensee
SBA did not propose any change in the provisions governing
additional investment in a Portfolio Concern that no longer meets the
size standard. However, one commenter suggested that proposed
Sec. 107.760(a) should be revised to allow a Licensee to make
additional investments in such a concern either to honor a Commitment
it has made or to protect its investment. The proposed rule already
allows a Licensee to make follow-on investments without restriction in
any Portfolio Concern up to the time it makes a public offering, so the
commenter's suggestion would be relevant only after that time. SBA has
added language to the final rule permitting a Licensee to honor a
Commitment made before a public offering, since it would be legally
bound to do so in any case. However, the Agency believes the
``protection of investment'' standard is so broad as to be inconsistent
with the goals of the program and has not adopted this change.
In response to a comment, proposed Sec. 107.760(b) is being adopted
as final with one non-substantive change. Paragraphs (b)(2) and (b)(3),
which state that violations under paragraph (b) constitute default by
the Small Business and allow the Licensee to pursue certain remedies,
have been deleted. SBA agrees that these provisions cover matters that
should be left to the Licensee and that it is unnecessary to include
them in the regulations.
j. Definition of ``Equity Securities''
SBA received two comments on the definition of Equity Securities in
proposed Sec. 107.800. One suggested that the definition should include
warrants
[[Page 3184]]
and options. SBA agrees and has revised the section accordingly. The
other commenter sought clarification of the statement that the presence
of certain default or redemption provisions would cause a security,
even if it has the legal form of equity, to be considered a Debt
Security ``for all regulatory purposes''. SBA's intent was that such a
security would be treated as a Debt Security only for purposes of
Sec. 107.855, the Cost of Money regulations. The final rule is revised
accordingly.
k. Options Received From Small Businesses
Except for the following changes and revisions, proposed
Sec. 107.815(b) is adopted as final. This section restricts the ability
of a Licensee's employees, officers, directors, or general partners to
receive options in a Small Business Financed by the Licensee. Under the
proposed rule, such persons could receive options only if they
participated in the Financing on the same terms and conditions as the
Licensee (paragraph (b) (1)) or if approved by SBA (paragraph (b) (2)).
Three comments were received on this section. Two suggested that
paragraph (b) not be applicable to non-leverage SBICs and SBA agrees.
The provision is revised accordingly.
Two commenters suggested that the regulations should permit the
receipt of stock options as compensation of service as a board member,
as this is a common practice in the industry and is beneficial to the
Small Business. SBA agrees and has added Sec. 107.815(b)(3) to the
final rule to permit this practice, with the condition that the
compensation paid must not exceed that paid to other outside board
members. In the absence of such board members, fees must be reasonable
when compared with amounts paid to outside directors of similar
companies.
l. Guarantees of the Obligations of Small Businesses
SBA received one comment seeking to clarify that if a Licensee
invests in a Small Business and also guarantees its debt obligation,
the guaranty should count against the overline limitation only to the
extent of the Licensee's risk over and above its original investment.
The situation described by the commenter is covered by
Sec. 107.820(a)(2), which states that a guaranty consisting only of ``a
pledge of the Equity Securities of the issuer'' does not count towards
the overline limitation.
m. Commitments to Small Businesses
SBA received one comment suggesting that proposed Sec. 107.825 be
deleted, a second suggesting that it be moved back to the definitions
section, and a third seeking clarification as to whether ``reasonable
conditions precedent'' to a Licensee's obligation to fund its
commitment can include ``completion of due diligence which confirms the
accuracy of the initial business plan''.
SBA is not deleting the defined term ``Commitment'' from the
regulations because it is used in several important contexts (see, for
example, the new provision in Sec. 107.860(g) that allows a Licensee to
charge a ``breakup fee'' if a Small Business accepts its Commitment and
then fails to close because it has accepted funds from another source).
SBA agrees that proposed Sec. 107.825 properly belongs in the
definitions section and has revised the final rule accordingly.
SBA has addressed the meaning of ``reasonable conditions
precedent'' in an earlier preamble and will repeat that discussion
here: Although SBA is reluctant to provide a list of reasonable
conditions precedent in the regulation for fear that such list might be
regarded as an exclusive one, it is willing to describe ``reasonable
conditions precedent'' in general terms. A ``reasonable condition
precedent'' is one that does not lie within the Licensee's ability to
cause or prevent. ``Completion of due diligence with results
satisfactory to the Licensee'' is an example of a condition precedent
that lies within the Licensee's control. On the other hand,
requirements that a disinterested person verify the value of the Small
Businesses' assets or its net worth, or that there be no adverse change
in the Small Businesses' financial condition between the date of the
commitment and the scheduled disbursement date, or that the Small
Business do or achieve something that lies reasonably within its
capacity would all be considered a ``reasonable condition precedent.''
n. Purchasing Securites From an Underwriter
Comments received on proposed Sec. 107.828 requested relief for
non-leveraged Licensees, reduction or elimination of recordkeeping
requirements and reconsideration of fee limitations for Associate
underwriters. SBA believes certain constraints on purchasing securities
from underwriters are warranted in keeping with the purpose of the Act,
but has made some revisions in response to the comments. Non-leveraged
Licensees have been exempted from the recordkeeping requirements in
paragraph (b) and the fee restrictions in paragraph (c). For leveraged
Licensees, paragraph (c) has been revised to permit a Licensee to pay
``reasonable and customary'' commissions and expenses to an Associate
underwriter, provided the Licensee is purchasing no more than 25
percent of the total offering.
In the final rule, this section is renumbered as Sec. 107.825.
o. Minimum Term of Financing
The comments received on proposed Sec. 107.830 strongly supported
the changes made with regard to the minimum term of Financings for
Section 301(d) Licensees. One commenter suggested allowing Section
301(c) Licensees to have up to 25 percent of their investments with
less than a five year term as long the weighted average duration of the
portfolio is at least five years. SBA believes such a provision is not
in keeping with the intent of the Act and would impose a burdensome
recordkeeping requirement. Accordingly, SBA is finalizing the proposed
rule without change.
p. Exceptions to Minimum Term of Financing
One commenter requested a clarification of proposed Sec. 107.835,
which allows a Licensee to make Short-term Financings (with terms less
than five years) under certain circumstances. The commenter asked
whether the provision in paragraph (c), which limits the dollar amount
of Short-Term Financings to 20 percent of total Loans and Investment
applies only to that paragraph or to all of Sec. 107.835, as has been
the case in the past. It was SBA's intent to apply the 20 percent limit
only to paragraph (c), which deals with Short-Term Financing for the
purpose of financing a change in ownership under proposed Sec. 107.750.
Therefore, the section is finalized as proposed. However, as stated in
the preamble to the proposed rule, Licensees should bear in mind that
the purpose of the SBIC program, as stated in the Act, is to provide
equity capital and long-term loan funds to Small Businesses. Thus,
Licensees should not plan to have the bulk of their portfolios in
short-term investments; to do so would constitute engaging in
activities not contemplated by the Act.
q. Maximum Term of Financing
All of the comments received on proposed Sec. 107.840 suggested
that the general rule which requires a maximum term of not longer than
20 years for any
[[Page 3185]]
Financing should apply only to Loans and Debt Securities. SBA agrees
and has revised the final rule accordingly.
r. Redemption of Equity Securities
Two comments were received on proposed Sec. 107.850. One commenter
suggested that book value should be a permitted basis for determining
the redemption price of an Equity Security under
Sec. 107.850(b)(2)(ii). SBA agrees and has revised the final rule
accordingly.
The other commenter stated that Sec. 107.850(b)(1) should be
broadened to allow accumulated dividends to be included in the
redemption price of an Equity Security. SBA is not adopting this
change. A Licensee is already permitted to structure its investments in
this manner; the only consequence is that such investments are subject
to the Cost of Money rules. Furthermore, as long as the dividends are
payable only from earnings, such investments are not precluded from
qualifying as Equity Capital Investments.
s. Cost of Money
Under proposed Sec. 107.855, SBA sought to substantively revise
some of the Cost of Money rules and to clarify others. SBA received six
comments on this section, two of which advocated deleting the entire
section and letting the market control. While the proposed rule gave
Licensees considerable more flexibility than in the past, the Agency
believes that some Cost of Money rules are necessary to provide a
measure of protection for Small Businesses. The commenters generally
applauded the increase in the minimum ``Cost of Money ceiling'' for
Loans in Sec. 107.855(c); however, some argued that the ceiling for
Debt Securities should also be raised. SBA believes that the proposed
five percentage point difference between Loans and Debt Securities is
justified because Loans do not allow for the Licensee to obtain any
equity interest in the Small Business, and is finalizing this provision
without change.
One comment stated that it was very important for Licensees to be
able to establish the Cost of Money ceiling for a Financing as of the
date a Commitment is issued, not as of the date of the first closing as
proposed in Sec. 107.855(b). The commenter explained that if rates went
up between a Commitment date and a closing date, they would be able to
increase the rate quoted in the Commitment. However, if rates went
down, they would be forced by regulations to close at the lower rate.
SBA is persuaded that Licensees should have flexibility in this area
and has revised this paragraph to allow the ceiling to be set either at
the time the Commitment is issued or as of the date of the first
closing of the Financing.
A Licensee is permitted to compute its Cost of Money ceiling based
on either the current Debenture rate on its own ``Cost of Capital'' as
determined under proposed Sec. 107.855(d). SBA received one comment
suggesting that non-leveraged Licensees should be permitted to compute
a Cost of Capital based on their non-SBA borrowings. The proposed rule
would permit this practice and is therefore finalized without change.
Proposed Sec. 107.855(g)(10) would allow a Licensee to charge a
higher interest rate when a Small Business is in default. For this
purpose, ``default'' is defined to include failure to provide
information required under SBA regulations. One commenter pointed out
that this appears to require Small Businesses to have knowledge of SBA
regulations, and that it is the responsibility of Licensees to put all
necessary default provisions in the Financing documents. SBA agrees and
has deleted the reference to SBA regulations from the final rule.
Proposed Sec. 107.855(i)(3) would allow Licensees to charge a one-
time ``bonus'' at the end of a loan instead of taking equity in the
Small Business. One commenter suggested that the bonus not be limited
to one time only, and that the bonus be computable on the earlier of
five years or when the debt was originally due.
SBA proposed the bonus to allow Licensees to obtain an adequate
return on Financings of companies that do not want to give up equity.
The Agency believes the proposed rule provides Licensees with
sufficient flexibility and is not adopting the suggested changes.
However, SBA is clarifying Sec. 107.855(i)(1) in the final rule to
state that the bonus is computable ``on or after the date that the
Financing is repaid in full or was originally scheduled to be repaid in
full, whichever is earlier''.
SBA has also made an editorial change in Sec. 107.855(i)(3), which
states that a bonus must be contingent upon factors that reflect the
performance of the Small Business. As an example, the proposed rule
stated that net income and operating cash flow were generally
acceptable factors, while gross revenue and gross profit were generally
unacceptable. One commenter interpreted ``gross profit'' as pretax
profit and suggested that this should be acceptable. SBA's
interpretation of ``gross profit'' was the difference between sales and
cost of goods sold, also known as ``gross margin''; to avoid confusion,
the latter term is used in the final rule.
s. Financing Fees Charged to Small Businesses
Two comments received on proposed Sec. 107.860 dealt with problems
faced by Licensees in their dealings with Small Businesses that apply
for Financing. According to the comments received, it is not unusual
for a Small Business to use a Licensee's Commitment to solicit
competing offers. Also, there are a number of frivolous ``shoppers''
who will use a Licensee's time and resources with no genuine intent of
closing a transaction. One such commenter suggested that Licensees be
permitted to address these problems by charging a ``break-up'' fee if a
Small Business fails to close a Financing because it has accepted funds
from another source. SBA is persuaded that the break-up fee represents
a reasonable protection for Licensees and has finalized Sec. 107.860
with a new paragraph (g) containing this provision. The permitted fee
is the same as the closing fee the Licensee would have been permitted
to charge under Sec. 107.860 (c) or (d).
Another comment questioned whether the ``application fee'' and the
``closing fee'' had to be two distinct fees separately identified, or
whether they could both be collected together at closing. To clarify
SBA's intent, language has been added to paragraph (a) of the final
rule stating that the application fee may be collected at closing or at
any time before closing.
t. Control of a Small Business
Twelve comments were received on proposed Sec. 107.865. One comment
objected to paragraph (b) which establishes a ``presumption of
Control'' based on a Licensee's percentage of ownership, stating that
this paragraph represented a ``poor and onerous change'', and further
noting that investor groups typically own 75 percent of a business by
the second or third round of Financing. In response, SBA, wishes to
point out that the proposed provisions concerning the presumption of
Control are exactly the same as those in the previous regulations.
However, proposed paragraph (c) was added to identify specific
conditions that would permit the presumption of Control to be rebutted.
By defining such conditions, the provision was actually intended to
make it easier for a Licensee to co-invest.
With respect to proposed Sec. 107.865(c), two commenters argued
that the ``presumption of Control'' should be
[[Page 3186]]
rebutted if management can elect 25 percent of the board seats. SBA
believes 40 percent is an appropriate standard for an automatic
rebuttal; Licensee can still seek to rebut the presumption based on
other evidence if this test is not met. Accordingly, proposed
paragraphs (b) and (c) are finalized without change.
u. Temporary Control
Proposed Sec. 107.865(d) set out those circumstances under which a
Licensee may take temporary Control of a Small Business, and includes
the provision: ``(1) Where reasonably necessary for the protection of
your investment under circumstances where a Small Business is
threatened with insolvency or closure.'' Several commenters suggested
that by the time insolvency or closure occurs, it is often too late to
``protect their investment''. SBA agrees and has revised the final rule
to delete all of the language after the word ``investment'' in
Sec. 107.865(d)(1). However, SBA advises Licensees that mere
disagreement with the management of a Small Business does not provide
grounds for taking temporary Control under this provision; rather, the
Licensee must be facing a clearly identifiable risk of financial loss.
In response to another comment, proposed Sec. 107.865(d)(3) has
been revised by deleting the world ``original'', which SBA agrees is
unnecessary. Another comment requested that temporary Control be
permitted if a Licensee satisfies either of the criteria in paragraph
(d)(3) instead of both. SBA considers the language in the proposed rule
to be appropriate and has not adopted the comment.
Proposed paragraph (d)(4) would allow a Licensee to take temporary
Control if the Financing is a Start-up Financing and the Licensee (or
investor group including the Licensee) is the concern's major source of
capital. It was suggested by one commenter that this paragraph should
also allow temporary Control if the Financing is a ``change of Control
of a Small Business pursuant to proposed Sec. 107.750.'' SBA believes
that the proposed temporary Control provisions give Licensees
sufficient protection and flexibility, and is finalizing
Sec. 107.865(d) without change.
SBA received three comments on proposed Sec. 197.865(e)(3)
questioning the reduction from seven years to five years of the time
limit for maintaining temporary Control (subject to an extension
granted by SBA in extraordinary circumstances). One comment suggested
going back to seven years, one questioned the necessity of any time
limit (due to the fact that it is inherent in the venture business to
want to exit investments as soon as possible), and one suggested
language stating that SBA would grant an extension if a Licensee can
establish ``that the relinquishment of Control will materially impair
the value'' of its investment.'' SBA rejects all three of these
suggestions and is finalizing Sec. 107.865(e)(3) as proposed. Control
is prohibited under the Act and SBA believes that exceptions to this
prohibition must be narrowly tailored. The Agency considers the five
year period sufficient in most cases and can grant exceptions if
circumstances warrant.
v. Management Fees for Services Provided to Small Businesses
Three comment letters were received regarding proposed
Sec. 107.900. While one commenter approved the liberalization of the
rules governing management services provided to Small Businesses, it
was suggested that greater liberalization is still needed. The other
two commenters argued in favor of expanding the criteria under which a
Licensee could provide management services to a Financed Small Business
without SBA approval. Specifically, they focused on the requirement
that the Services be provided only on an hourly fee basis. They
explained that the current trend is moving away from hourly billing
toward ``project fees'' and that hourly billing has been perceived as
being both inefficient and unfair. They further noted that while this
issue can be resolved by acquiring SBA's prior written approval
pursuant to proposed Sec. 107.900(c), this process is both time
consuming and burdensome. SBA has reexamined this issue in light of the
comments received and recognizes the reasonableness of this suggestion.
Therefore, proposed Sec. 107.900 is revised to allow a Licensee to
charge on a project fee or other reasonable basis. However, the burden
of proof will be on the licensee to demonstrate, upon request, that
fees charged to not exceed prevailing rates charged for comparable
services by other organizations in the geographic area of this Small
Business.
Paragraph (b), concerning fees for service as a board member, is
revised in the final rule in accordance with comments received, to
allow for fees to be paid in the form of cash, warrants or other
consideration. In addition, the following language is added at the end
of the last sentence of paragraph (b): ``* * * or, in the absence of
outside board members, amounts reasonable when compared to similar
companies with outside board members.''
Proposed Sec. 107.900(e)(2) discusses transaction fees which may be
charged a Small Business by a Licensee's Associate for services
performed in connection with a public or private offering made by the
Small Business or the sale of all or part of the business. The comment
received on this paragraph suggested that the 95 percent unrelated
revenue test was too restrictive and would force Small Businesses to
hire outside investment bankers who would be unfamiliar with the
company, which could result in higher fees. SBA is persuaded by this
argument and has deleted this provision from paragraph (e)(2).
Except for the revisions discussed above, Sec. 107.900 has been
finalized as proposed.
8. Subpart H--Non-Leveraged Licensees--Exceptions to Regulations
Two comments were received on proposed Sec. 107.1000. One
specifically praised the flexibility embodied in the proposal, which
provides a consolidated listing of those regulatory provisions from
which a non-leveraged Licensee would be exempt. The other comment
listed a number of sections from which non-leveraged Licensees should
be exempt, but these largely involved statutory requirements. As
discussed throughout this preamble, some additional provisions have
been added to this section. In addition to the exemptions in the
proposed rule, the final rule exempts non-leveraged Licensees from:
(1) The recordkeeping requirements and fee limitations in
Sec. 107.825(b) and (c) for securities purchased through or from an
underwriter;
(2) The requirement to obtain SBA's prior approval of initial
Management expenses under Sec. 107.140 and increases in Management
Expenses under Sec. 107.520;
(3) The prior approval requirement in Sec. 107.815(b) for options
obtained from a Small Business by the Licensee's management or
employees; and
(4) The requirement to obtain post approval for new directors and
new officers, other than the Licensee's chief operating officer. A
notification requirement has been substituted.
9. Subpart I--SBA Financial Assistance for Licensees (Leverage)
a. Types of Leverage Available
Only one comment was received on proposed Sec. 107.1100 which
strongly supported the language clarifying that a Section 301(d)
Licensee may apply for both Debenture and Participating Security
Leverage. The section is therefore finalized without change.
[[Page 3187]]
b. General Eligibility Requirements for Leverage
One comment was received on proposed Sec. 107.1120, objecting to
the presumption that only Licensees with $5 million or more of
Regulatory Capital are financially viable. The commenter stated that
this represents a 300 percent increase for Section 301(d) Licensees, is
not warranted and threatens the financial viability of Section 301(d)
Licensees. As stated previously in this preamble, SBA considers the
minimum capital requirements to be vital to the sound operation of the
SBIC program.
c. Requirement To File Quarterly Financial Statements
Proposed Sec. 107.1220 requires that Licensees file quarterly,
unaudited financial statements on SBA Form 468 (short form) within 30
days of the end of the quarter, so long as any part of SBA's Leverage
commitment is outstanding to the Licensee. A commenter suggested, and
SBA agrees, that this section should be revised to clarify that the
quarterly filing requirement does not apply at the Licensee's fiscal
year end, which is covered by the annual filing of Form 468 under
Sec. 107.630. The section is revised and finalized accordingly.
d. Draw-downs by Licensee Under SBA's Leverage Commitment
All three of the comment letters received on proposed Sec. 107.1230
objected to one of the requirements listed under the ``procedures for
funding draws'' in paragraph (d). As proposed, paragraph (d)(3) would
require a Licensee, when requesting a ``draw'' pursuant to SBA's
Leverage commitment, to furnish a statement to SBA ``that the proceeds
are needed to fund one or more particular Small Business, including the
name and address of each Small Business, and the amount and anticipated
closing date of each proposed financing.'' One commenter labeled this
paragraph an ``unnecessary burden requiring an act of prophecy.'' All
agreed that as investors, they are not motivated to draw capital and
not invest it, but that they may be looking at many investments at the
time of the request, expecting to make one or more investments based
upon proposals outstanding or being negotiated, and not all close. It
was further pointed out that some negotiations may delay closing or
alter amounts actually invested.
SBA considered this issue at length. As participants in the SBIC
program are aware, there is insufficient Leverage currently available
to meet demand, and no change is expected in the near future. This
places SBA in the position of having to allocate the limited Leverage
available among all the eligible applicants. Under these conditions,
SBA finds it useful to be able to review each Licensee's track record
in closing its anticipated investments as part of its evaluation of the
Licensee's need for Leverage in comparison with others. Thus, SBA is
not willing to delete the requirement for information on specific
planned Financings at this time.
Nevertheless, SBA is sympathetic to the commenters' concerns and is
open to future changes in this area, particularly if Leverage ceases to
be in short supply. In the final rule, the information requirements in
paragraph (d)(3) are preceded by the phrase ``if required by SBA''.
This language gives the Agency the flexibility to drop these
requirements in the future if conditions warrant, without having to
revise the regulations.
e. Participating Securities--Requirement To Make Equity Capital
Investments
Under proposed Sec. 107.1500(b)(4), which was unchanged from the
existing regulations, Licensees issuing Participating Securities would
have been required to make Equity Capital Investments equal to the
total amount of Participating Securities issued, and also to maintain
Equity Capital Investments in an amount equal to their outstanding
Participating Securities. SBA received a comment arguing strongly that
the requirement to maintain a certain level of Equity Capital
Investments should be deleted. The commenter's concern was that it is
impossible to predict when investments will be liquidated and that a
Licensee might fall into violation due to circumstances largely beyond
its control.
SBA appreciates the commenter's concern. However, section 303(g)(4)
of the Act specifically requires Licensees to ``maintain an amount
equal to the outstanding face value'' of Participating Securities in
Equity Capital Investments. Therefore, this requirement cannot be
abandoned, and the section is finalized as proposed. However, in
considering waiver requests, the Agency will give weight to
circumstances which suggest that noncompliance is the result of factors
not readily controllable by the Licensee.
f. Participating Securities--Liquidity Requirement
Proposed Sec. 107.1505(a) contained language giving SBA the right
to make the final determination of a Licensee's liquidity impairment.
SBA received a comment suggesting that this language be deleted. SBA is
persuaded that Licensees are unlikely to be motivated to manipulate the
liquidity computation in order to make distributions that would leave
them without sufficient liquidity to continue their operations;
therefore, this language has been deleted from the final rule.
g. Participating Securities--Computation of Earmarked Profit (Loss)
In proposed Sec. 107.1510(d), SBA attempted to provide a simplified
formula for the computation of Earmarked Profit (Loss) without changing
the substance of the calculation. One comment pointed out that the
revised language, which referred to ``Net Income (Loss) as reported on
SBA Form 468'', created ambiguity with respect to the treatment of user
fees paid to SBA and partnership syndication costs incurred by
Licensees. Licensees have presented these items on Form 468 using a
variety of accounting treatments, and in some cases have not made them
a component of Net Income (Loss).
SBA believes that Licensees should be permitted to treat both user
fees and syndication costs as expenses for the purpose of determining
Earmarked Profit (Loss). Accordingly, the final rule states that for
the purpose of determining Net Income (Loss) in the Earmarked Profit
formula, user fees and commitment fees paid to SBA, as well as
partnership syndication costs, must be capitalized and amortized on a
straight-line basis over five year. In all other respects, Net Income
(Loss) must be as reported on SBA Form 468.
h. Participating Securities--Base for Profit Participation
Proposed Sec. 107.1530(c) presented the formula for the Base on
which a Licensee computes SBA Profit Participation. There was no change
proposed in the formula; however, SBA received one comment pointing out
a situation in which the formula produces an unintended result. If a
Licensee were to compute and distribute Profit Participation for an
interim period, and then experience losses during the remainder of its
fiscal year which partially offset the interim profit, the later losses
could not be included in Unused Losses for the purpose of determining
the Base going forward. SBA agrees with the need for a technical
correction of the Unused Loss definition, and is finalizing
Sec. 107.1530(c) with the necessary revision.
[[Page 3188]]
i. Participating Securities--``PLC Ratio'' Used in Profit Participation
Rate Formula
Proposed Sec. 107.1530(e)(2) set forth the conditions under which a
Licensee can reduce its PLC Ratio by increasing its Leverageable
Capital. A reduction of the PLC Ratio has the effect of reducing the
Licensee's Profit Participation Rate. One commenter suggested that a
Licensee should be permitted to include a Leverageable Capital increase
in the ratio without express SBA approval, provided the increase was
the result of the takedown of commitments or the conversion to cash of
non-cash assets included in Private Capital. Language to this effect
was previously included in the regulations and was inadvertently
dropped from the proposed rule. It has been restored in the final
version of Sec. 107.1530(e)(2).
j. Participating Securities--Adjustment of Interim Profit Participation
Calculations for Changes in the Year-End Profit Participation Rate
SBA received a comment suggesting that proposed Sec. 107.1530(h)(3)
be deleted. This provision, which was unchanged from the existing
regulations, stated that if a Licensee computing Profit Participation
had previously made an interim computation during the same fiscal year,
it would be required to adjust the interim amount to account for any
subsequent increases in the Profit Participation Rate. The commenter
pointed out that the provision was inconsistent with the mechanics of
Sec. 107.1530(h) (1) and (2), which resulted in automatic adjustment of
interim computations for subsequent increases or decreases in the
Licensee's Profit Participation Rate.
SBA agrees that the provisions are inconsistent; however, the
preamble to the April 8, 1994 final rule concerning the Participating
Securities program (59 FR 16898) makes the following statement: ``Any
computation of Profit Participation made as of the close of an interim
fiscal quarter is subject to adjustment whenever any subsequent interim
distributions are contemplated, and at the end of the fiscal year, in
order to account for any increase in the Profit Participation Rate. If
the Profit Participation Rate decreases as a result of an approved
increase in Leverageable Capital, Profit Participations already
computed for any interim periods shall not be adjusted.''
Thus, with respect to the original intent of the regulations, the
error in the proposed rule is found not in paragraph (h)(3), but in
paragraphs (h)(1) and (h)(2), which incorrectly adjust interim Profit
Participation computations for decreases in the Rate as well as
increases. Accordingly, in the final rule, SBA has revised paragraph
(h) so that an adjustment takes place only when the Profit
Participation Rate increases.
k. Participating Securities--Basis for Distribution of Prioritized
Payments and Adjustments
Proposed Sec. 107.1540(a), which is essentially the same as the
existing regulation, would require a Licensee to distribute the balance
in its Distribution Account (consisting of Earned Prioritized Payments
and earned Adjustments) annually, based on its profits as determined
under Sec. 107.1520. One commenter pointed out that ``no distinction is
made in Sec. 107.1520 between cash and non-cash earnings. Consequently,
this provision effectively requires that a Licensee make an annual
distribution of cumulative profits to pay Prioritized Payments even if
the Licensee did not receive cash for all or a portion of these
profits.'' The commenter suggested that distributions should be
required only for profits earned by the Licensee in cash.
SBA appreciates the concern expressed, but has decided to finalize
this section as proposed. The Agency believes that Licensees are
sufficiently protected by the provision in Sec. 107.1540(a) that makes
all distributions under Sec. 107.1540 conditional upon the satisfaction
of the liquidity requirement in Sec. 107.1505. Thus, a Licensee that
had received only non-cash income likely would be precluded from making
a distribution.
l. Payment of Prioritized Payments on Participating Securities in Order
of Issue Date
Under proposed Sec. 107.1540(c), Licensees would be required to pay
Prioritized Payments on their Participating Securities in order of the
securities' issue dates. One commenter pointed out that this would
impose a substantial burden by requiring Licensees to maintain detailed
sub-accounts to track the Accumulated Prioritized Payments associated
with each individual Participating Security, and would not provide any
benefit to the Agency. SBA agrees that this provision is unnecessary
and has deleted it in the final rule.
m. Participating Securities--Computation of ``Maximum Tax Liability''
Proposed Sec. 107.1550(b) set forth the formula used to compute a
Licensee's Maximum Tax Liability, from which the Licensee calculates
its permitted tax distribution. One element in the formula is ``total
ordinary income'' allocated to Licensee's investors for Federal income
tax purposes. One commenter sought clarification as to whether this
phrase was intended to represent ordinary income less ordinary
deductions. That is the interpretation intended by SBA, and the
paragraph has been revised in the final rule to clarify the meaning.
With respect to the same paragraph, the commenter also suggested
that ``total ordinary income'' be defined to exclude expenses that
partners may not be able to deduct fully under the tax law. SBA
believes this suggestion is inconsistent with the Act, which refers to
``income allocated to each partner or shareholder * * * for Federal
income tax purposes'' and does not provide for any adjustment for
nondeductible expenses. Furthermore, the Agency finds no compelling
reason to provide all investors with an additional benefit based on the
possibility that some may face limitations on their deductions.
n. Participating Securities--Payment Dates
SBA received several comments concerning the Participating Security
distribution regulations (Secs. 107.1540 through 107.1570) which would
require Licensees to make distributions only on quarterly Payment
Dates. All the commenters objected to the inflexibility of these
provisions. As stated in the preamble to the proposed rule, the Payment
Dates represent the dates on which Trust Certificate holders receive
interest payments and any returns of principal to which they are
entitled. Because Participating Securities can be redeemed only on
Payment Dates, the proposed rule limited Licensees' distributions to
these dates to avoid certain problems, such as the question of who is
responsible for Prioritized Payments on a Participating Security during
the interval between the making of a distribution and the actual
redemption of the Participating Security with the proceeds of the
distribution.
However, SBA recognizes that the loss of flexibility under the
Payment Date structure can have a significant negative impact on both
the Licensee and the Agency, particularly in the case of distributions
to be made in the form of securities. In this instance, the
restrictions may force the Licensee to hold securities for a
substantial period of time, during which the Licensee and its investors
(including SBA) would be subject to a high degree of market risk.
Because of time constraints, SBA is unable to modify the Payment
Date restrictions in this final rule. However,
[[Page 3189]]
the Agency intends to seek a solution that will provide Licensees with
greater flexibility in making distributions of securities, and to
publish a proposed rule dealing with this problem as soon as possible.
One change concerning the timing of distributions is being
incorporated in the final rule. In the preamble to the proposed rule,
SBA indicated that it was willing to consider allowing tax
distributions under Sec. 107.1550 to be made during some window period
between the February 1 and May 1 Payment Dates, in order to allow
investors to receive cash before their Federal tax filing deadlines.
Based on the comments received, SBA is finalizing Sec. 107.1550(d) with
revised language permitting a tax Distribution to be made between March
1 and April 15 by a Licensee with a December 31 year end. Licensees
still must pay all Prioritized Payments before being eligible to make a
tax distribution.
o. Trust Certificates
During the comment period, SBA reviewed proposed Secs. 107.1600
through 107.1680 pertaining to Trust Certificates guaranteed by SBA to
fund Leverage. Section 321 of the Act and the documentation of the
Trust Certificates are very specific with respect to the terms and
conditions. SBA has chosen to shorten these sections by eliminating
language contained in the statute or detailed in the Trust
Certificates. None of the changes made to the proposed Secs. 107.1600
through 107.1680 are substantive. In the final rule, Trust Certificates
are covered in renumbered Secs. 107.1600 through 107.1640.
p. Miscellaneous Leverage Provisions
In the final rule, SBA has eliminated proposed Sec. 107.1700(a) and
(c) as redundant and unnecessary language. Section 321(a) of the Act is
specific with respect to SBA's unconditional guarantee and the
requirement for a bond. SBA will continue to provide for an
unconditional guarantee. The bonding requirement has been eliminated in
this section as well as in the Trust Certificate sections because the
bond is required by statute.
10. Subpart J--Licensee's Noncompliance With Terms of Leverage
a. Capital Impairment
SBA received one comment on proposed Sec. 107.1840(d)(6), which
would have required a Licensee, in computing its Capital Impairment
Percentage, to reduce its ``Adjusted Unrealized Gain'' by the amount of
any borrowing or other obligation associated with portfolio securities
that were the source of the Unrealized Appreciation used as the basis
for determining the Adjusted Unrealized Gain. The commenter correctly
pointed out that the reduction should be limited to the extent of the
Unrealized Appreciation. SBA agrees and has finalized the provision
accordingly.
11. Appendices to Part 107
The existing regulations include two appendices: Appendix I,
Accounting Standards and Financial Reporting Requirements for Small
Business Investment Companies, and appendix II, Valuation Guidelines
for SBICs. SBA has decided to delete the appendices from Part 107, and
will publish them in a different format at a later date. Although they
are no longer part of the regulations themselves, both the accounting
standards and the valuation guidelines remain applicable to all
Licensees.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the
Paperwork Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this final rule will not be a significant
regulatory action for purposes of Executive Order 12866 because it will
not have an annual effect on the economy of more than $100 million, and
that it will not have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq.
The primary purpose of the rule is to streamline the regulations
governing the SBIC program by eliminating obsolete regulations and
reorganizing the remainder in a more logical and readable format.
Two areas of the regulations will have some economic effect,
including possible effects on small entities. First, license
application fees and examination fees will be raised. An SBIC license
applicant will pay a fee of $10,000 to $20,000, compared with the
current $5,000. This increase is not significant relative to the
private capital of an average Licensee, which exceeds $10 million. Exam
fees will continue to be based on the total assets of a Licensee, but
at higher rates. The largest Licensees, generally those with several
hundred million dollars of assets, could experience fee increases of
$20,000 or more; however, the number of such Licensees is currently
very small.
Second, the changes in the regulations governing ``Cost of Money''
(the maximum amount a Licensee can charge on loans and debt securities)
will potentially affect the borrowing costs of small entities. Although
the interest rate on loans is determined primarily by market forces,
the final rule will raise the interest rate ceiling on loans extended
by Licensees from 15 percent to 19 percent. The total amount of loans
provided to small businesses by Licensees is approximately $240 million
per year. Even if the additional four percentage points were charged on
the entire balance of such loans, the annual economic impact would be
less than $10 million.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this final rule contains no new reporting or record
keeping requirements that have not already been approved by the Office
of Management and Budget. The ``Financing Eligibility Statement'' (SBA
Form 1941) which is required under Sec. 107.610 has already been
approved by OMB under Control Number 3245-0301.
For purposes of Executive Order 12612, SBA certifies that this rule
does not have any federalism implications warranting the preparation of
a Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.
List of Subjects in 13 CFR Part 107
Investment companies, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses.
For the reasons set forth above, SBA hereby revises Part 107 of
Title 13 of the Code of Federal Regulations to read as follows:
BILLING CODE 8025-01-M
Complete official Federal Register PDF
FR Doc. 96-1907 Groundfish of the Gulf of Alaska; Pollock in Statistical Area 62
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Page 3333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1907]
-----------------------------------------------------------------------
DEPARTMENT OF COMMERCE
50 CFR Part 672
[Docket No. 951120272-5272-01; I.D. 012696B]
Groundfish of the Gulf of Alaska; Pollock in Statistical Area 62
AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and
Atmospheric Administration (NOAA), Commerce.
ACTION: Closure.
-----------------------------------------------------------------------
SUMMARY: NMFS is prohibiting directed fishing for pollock in
Statistical Area 62 in the Gulf of Alaska (GOA). This action is
necessary to prevent exceeding the interim specification for pollock in
this area.
EFFECTIVE DATE: 12 noon, Alaska local time (A.l.t.), January 29, 1996,
until superseded by the final 1996 specifications.
FOR FURTHER INFORMATION CONTACT:
Mary Furuness, 907-586-7228.
SUPPLEMENTARY INFORMATION: The groundfish fishery in the GOA exclusive
economic zone is managed by NMFS according to the Fishery Management
Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North
Pacific Fishery Management Council under authority of the Magnuson
Fishery Conservation and Management Act. Fishing by U.S. vessels is
governed by regulations implementing the FMP at 50 CFR parts 620 and
672.
The interim specification of pollock total allowable catch in
Statistical Area 62 was established by Interim 1996 Harvest
Specifications (60 FR 61492, November 30, 1995) as 3,125 metric tons
(mt), determined in accordance with Sec. 672.20(c)(1)(ii)(A).
The Director, Alaska Region, NMFS (Regional Director), has
determined, in accordance with Sec. 672.20(c)(2)(ii), that the 1996
interim specification of pollock in Statistical Area 62 soon will be
reached. The Regional Director established a directed fishing allowance
of 2,925 mt, and has set aside the remaining 200 mt as bycatch to
support other anticipated groundfish fisheries., Consequently, NMFS is
prohibiting directed fishing for pollock in Statistical Area 62 until
superseded by the Final 1996 Harvest Specifications of Groundfish in
the Federal Register.
Maximum retainable bycatch amounts for applicable gear types may be
found in the regulations at Sec. 672.20(g). Classification
This action is taken under 50 CFR 672.20 and is except from review
under E.O. 12866.
Authority: 16 U.S.C. 1801 et seq.
Dated: January 26, 1996.
Richard H. Schaefer,
Director, Office of Fisheries Conservation and Management, National
Marine Fisheries Service.
[FR Doc. 96-1907 Filed 1-26-96; 3:28 pm]
BILLING CODE 3510-22-M
Complete official Federal Register PDF
FR Doc. 96-1906 Groundfish of the Gulf of Alaska; Pollock in Statistical Area 61
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3332-3333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1906]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF COMMERCE
National Oceanic and Atmospheric Administration
50 CFR Part 672
[Docket No. 951120272-5272-01; I.D. 012696A]
Groundfish of the Gulf of Alaska; Pollock in Statistical Area 61
AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and
Atmospheric Administration (NOAA), Commerce.
ACTION: Closure.
-----------------------------------------------------------------------
SUMMARY: NMFS is prohibiting directed fishing for pollock in
Statistical Area 61 in the Gulf of Alaska (GOA). This action is
necessary to prevent exceeding the interim specification for pollock in
this area.
EFFECTIVE DATE: 12 noon, Alaska local time (A.l.t.), January 28, 1996,
until superseded by the final 1996 specifications.
FOR FURTHER INFORMATION CONTACT:
Mary Furuness, 907-586-7228.
SUPPLEMENTARY INFORMATION: The groundfish fishery in the GOA exclusive
economic zone is managed by NMFS according to the Fishery Management
[[Page 3333]]
Plan for Groundfish of the Gulf of Alaska (FMP) prepared by the North
Pacific Fishery Management Council under authority of the Magnuson
Fishery Conservation and Management Act. Fishing by U.S. vessels is
governed by regulations implementing the FMP at 50 CFR parts 620 and
672.
The interim specification of pollock total allowable catch in
Statistical Area 61 was established by Interim 1996 Harvest
Specifications (60 FR 61492, November 30, 1995) as 6,125 metric tons
(mt), determined in accordance with Sec. 672.20(c)(1)(ii)(A).
The Director, Alaska Region, NMFS (Regional Director), has
determuined, in accordance with Sec. 672.20(c)(2)(ii), that the 1996
interim specification of pollock in Statistical Area 61 soon will be
reached. The Regional Director established a directed fishing allowance
of 5,925 mt, and has set aside the remaining 200 mt as bycatch to
support other anticipated groundfish fisheries. Consequently, NMFS is
prohibiting directed fishing for pollock in Statistical Area 61 until
superseded by the Final 1996 Harvest Specifications for Groundfish in
the Federal Register.
Maximum retainable bycatch amounts for applicable gear types may be
found in the regulations at Sec. 672.20(g).
Classification
This action is taken under 50 CFR 672.20 and is exempt from review
under E.O. 12866.
Authority: 16 U.S.C. 1801 et seq.
Dated: January 26, 1996.
Richard H. Schaefer,
Director, Office of Fisheries Conservation and Management, National
Marine Fisheries Service.
[FR Doc. 96-1906 Filed 1-26-96; 3:28 pm]
BILLING CODE 3510-22-M
Complete official Federal Register PDF
FR Doc. 96-1905 Chlorpyrifos; Pesticide Tolerance
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3328-3330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1905]
-----------------------------------------------------------------------
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 180
[PP 4E4288 and 4E4289/R2198; FRL-4995-1]
RIN 2070-AC18
Chlorpyrifos; Pesticide Tolerance
AGENCY: Environmental Protection Agency (EPA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This rule revises tolerances for residues of the insecticide
chlorpyrifos in or on the raw agricultural commodities peaches, pears,
plums, and nectarines by establishing the current time-limited
tolerances as permanent tolerances. The regulations to establish
maximum permissible levels of residues of the insecticide were
requested in petitions submitted by DowElanco and are needed to cover
maximum expected residues in or on imported commodities.
EFFECTIVE DATE: This regulation became effective January 24, 1996.
ADDRESSES: Written objections and hearing requests, identified by the
docket control number, [PP 4E4288 and 4E4289/R2198], may be submitted
to: Hearing Clerk (A-110), Environmental Protection Agency, Rm. M3708,
401 M St., SW., Washington, DC 20460. A copy of any objections and
hearing requests filed with the Hearing Clerk should be identified by
the docket control number and submitted to: Public Response and Program
Resources Branch, Field Operations Division (7506C), Office of
Pesticide Programs, Environmental Protection Agency, 401 M St., SW.,
Washington, DC 20460. In person, bring copy of objections and hearing
requests to Rm. 1132, CM 1B2, 1921 Jefferson Davis Highway, Arlington,
VA. Fees accompanying objections shall be labeled ``Tolerance Petition
Fees'' and forwarded to: EPA Headquarters Accounting Operations Branch,
OPP (Tolerance Fees), P.O. Box 360277M, Pittsburgh, PA 15251.
An electronic copy of objections and hearing requests filed with
the Hearing Clerk may be submitted to OPP by sending electronic mail
(e-mail) to:
[email protected]
Copies of electronic objections and hearing requests must be
submitted as an ASCII file avoiding the use of special characters and
any form of encryption. Copies of electronic objections and hearing
requests will also be accepted on disks in WordPerfect 5.1 file format
or ASCII file format. All copies of electronic objections and hearing
requests must be identified by the docket number [PP 4E4288 and 4E4289/
R2198]. No Confidential Business Information (CBI) should be submitted
through e-mail. Copies of electronic objections and hearing requests on
this rule may be filed online at many Federal Depository Libraries.
Additional information on electronic submissions can be found below in
this document.
FOR FURTHER INFORMATION CONTACT: By mail: Dennis H. Edwards, Jr.,
Product Manager (PM) 19, Registration Division (7505C), Office of
Pesticide Programs, Environmental Protection Agency, 401 M St., SW.,
Washington, DC 20460. Office location, telephone number, and e-mail
address: Rm. 207, CM #2, 1921 Jefferson Davis Highway, Arlington, VA,
(703) 305-6386; e-mail:[email protected].
SUPPLEMENTARY INFORMATION: EPA issued a proposed rule, published in the
Federal Register of September 28, 1993 (58 FR 68621) which announced
that DowElanco had submitted pesticide petitions (PP 4E4288 and PP
4E4289) to the Administrator, pursuant to section 408(e) of the Federal
Food, Drug, and Cosmetic Act (FFDCA), 21 U.S.C. 346a(e), to amend 40
CFR 180.342 by revising the tolerances for residues of the insecticide
chlorpyrifos [O,O-diethyl O-(3,5,6-trichloro-2-pyridyl)
[[Page 3329]]
phosphorothioate] in or on the raw agricultural commodity pears from
0.01 to 0.05 part per million (ppm) and peaches, nectarines, and plums
from 0.01 ppm to 0.05 ppm. These revisions in the tolerances were
needed because of differing use patterns of chlorpyrifos in other parts
of the world as compared to the U.S.
The Agency reviewed preliminary residue data and concluded that
residues should not exceed the proposed tolerances, but determined that
additional residue data for imported pears, peaches (data for peaches
suffices for nectarines), plums and prunes (the processed commodity of
plums) were required.
Pending submission and review of the data, the Agency issued a
final rule, published in the Federal Register of February 25, 1994 (59
FR 9095), which announced that the Agency had revised the tolerances
for a 2-year period. The expiration date is January 28, 1996, at which
time the tolerances would revert to the previous 0.01 ppm for the named
commodities.
Additional residue data for pears, peaches, and plums were
submitted. (It was determined that chlorpyrifos residues do not
concentrate in the processing of plums to prunes, and no data were
submitted or required.) The data were reviewed and were determined to
be sufficient to justify removing the time limitation from the existing
tolerances. The available data do not support a change in the U.S. use
pattern for the crops listed above. If such a change is desired,
additional residue data generated in the U.S. must be submitted.
The scientific data submitted in the petitions and other relevant
material have been evaluated. The toxicological data considered in
support of the tolerance include:
1. A 2-year dog feeding study with a no-observed-effect level
(NOEL) for systemic effects of 1.0 milligram (mg)/kilogram (kg)/day and
lowest effect level (LEL) (increased liver weight) of 3.0 mg/kg/day.
The NOELs for cholinesterase (ChE) inhibition were as follows: 0.01 mg/
kg/day for plasma, 0.1 mg/kg/day for red blood cells, and 1.0 mg/kg/day
for brain cells. Levels tested were 0, 0.01, 0.03, 0.1, 1.0, and 3 mg/
kg/day.
2. A voluntary human study with chronic ChE NOEL of 0.03 mg/kg/day
(based on 20 days of exposure at this level).
3. A 2-year mouse chronic toxicity/carcinogenicity study with a
NOEL of 15 ppm for systemic effects (equivalent to 2.25 mg/kg/day) and
no carcinogenic effects observed under the conditions of the study at
all levels tested (0, 0.5, 5, and 15 ppm, equivalent to 0.075, 0.75,
and 2.25 mg/kg/day).
4. A voluntary human study with acute ChE NOEL of 0.10 mg/kg/day
(based on daily single-dose exposures of 0, 0.014, 0.03, or 0.10 mg/kg/
day) determined at 1, 3, 6, and 9 days of treatment.
5. A 2-year rat feeding/carcinogenicity study with ChE NOEL of 0.1
and LEL of 1.0 mg/kg/day (based on decreased plasma and brain ChE
activity), and a systemic NOEL of 1.0 mg/kg/day and LEL of 10 mg/kg/day
(based on decreased erythrocyte and hemoglobin values and increased
platelet count during the first year). There were no observed
carcinogenic effects at the levels tested (0.05, 0.1, 1.0, and 10 mg/
kg/day) under the conditions of the study. Chlorpyrifos is classified
as a Group E chemical (no evidence of carcinogenicity).
6. A three-generation reproduction study in rats with no
reproductive effects observed at the dietary levels tested (0, 0.1,
0.3, and 1.0 mg/kg/day).
7. Two rat developmental toxicity studies: one negative for
developmental toxicity at all dose levels (levels tested were 0.1, 3.0,
and 15.0 mg/kg/day); and one with maternal NOEL of 15 mg/kg/day and
developmental NOEL of 2.5 mg/kg/day (levels tested, by gavage, were 0,
0.5, 2.5, and 15 mg/kg/day).
8. A mouse developmental toxicity study with a teratogenic NOEL
greater than 25 mg/kg/day (highest dose tested) and a developmental
fetotoxic NOEL of 10 mg/kg/day and LEL of 25 mg/kg/day (decreased fetal
length and increased skeletal variants).
9. A developmental toxicity study in rabbits with maternal and
developmental NOELs of 81 mg/kg/day, and maternal and developmental
LELs of 140 mg/kg/day (based on maternal decreased food consumption on
gestation day 15 to 19, and body weight loss during the dosing period
followed by a compensatory weight gain; and based on a slight reduction
in fetal weights and crown-rump lengths, and fetal increased incidence
of unossified fifth sternebrae and/or xiphisternum). Levels tested were
0, 1, 9, 81, and 140 mg/kg/day.
10. An acute delayed neurotoxicity study in the hen that was
negative at 50 and 100 mg/kg/day.
11. Several mutagenicity studies which were all negative. These
include an Ames assay, two Chinese hamster ovary cell mutation assays,
a micronucleus assay for chromosomal aberration, an in vitro
chromosomal aberration assay with and without enzymatic activation, and
an unscheduled DNA synthesis assay.
12. A general metabolism study in rats shows that the major
metabolite of chlorpyrifos is 3,5,6-trichloro-2-pyridinol (TCP). The
studies listed below were conducted to demonstrate that TCP is less
toxic than chlorpyrifos and is not a ChE inhibitor.
a. A 90-day rat feeding study with a systemic NOEL of 30 mg/kg/day.
Levels tested were 0, 10, 30, and 100 mg/kg/day.
b. A rat developmental toxicity study with no developmental
toxicity observed at the dosages tested (0, 50, 100, and 150 mg/kg/
day).
c. Mutagenicity studies (including an Ames assay and an unscheduled
DNA synthesis assay) were negative for mutagenic effects.
Based on the above studies, the Agency has concluded that the TCP
metabolite is not of toxicological concern.
For the assessment of chronic dietary risk, the reference dose
(RfD) based on the human voluntary ChE study (ChE NOEL of 0.03 mg/kg/
day) and using a 10-fold uncertainty factor is calculated to be 0.003
mg/kg of body weight/day. Tolerances for food uses appear in 40 CFR
180.342 and 40 CFR 185.1000. The Dietary Risk Exposure Section (DRES)
used, when justified and appropriate, anticipated residues rather than
published tolerance values, and data regarding percent crop treated
(when less than 100%). The anticipated residue contribution (ARC) from
published uses of chlorpyrifos is 0.000860 mg/kg of body weight/day for
the overall U.S. population. This represents 28.7% of the RfD. None of
the DRES subgroups has an exposure that exceeds the RfD. The population
subgroup most highly exposed is non-nursing infants, less than 1 year
old, with an ARC from published uses of 0.002147 mg/kg of body weight/
day, 71.6% of the RfD. The next most highly exposed population subgroup
is children, 1-6 years old, with an ARC from published uses of 0.001914
mg/kg of body weight/day, 63.8% of the RfD. It should be noted that
these values include contributions from pears, nectarines, peaches, and
plums with tolerances of 0.05 ppm; the tolerances are already in place
as temporary tolerances. This rule converts existing, temporary
tolerances to permanent tolerances and does not raise the ARC as a
percentage of the RfD.
The DRES detailed acute analysis estimates the distribution of
single-day exposures for the overall U.S. population and certain
subgroups. The analysis evaluates individual food consumption as
reported by respondents in the USDA 1977-78
[[Page 3330]]
Nationwide Food Consumption Survey (NFCS) and accumulates exposure to
the chemical for each commodity. Each analysis assumes uniform
distribution of chlorpyrifos in the commodity. Since the toxicological
endpoint to which exposure is being compared in this analysis is
neurotoxicity, four human population subgroups (infants, less than 1
year old; children, 1-12 years old; females, 13 years old and older;
males, 13 years old and older), as well as the overall population, are
of interest.
The Margin of Exposure (MOE) is the ratio of the NOEL to the
exposure (NOEL/exposure = MOE). For neurotoxicity, the Agency is
generally not concerned unless the MOE is below 10 when the NOEL is
based on human data. Using refined exposure estimates generated in the
preparation of the Reregistration Eligibility Document (RED) for
chlorpyrifos, MOEs are greater than 10 for all population subgroups
evaluated except for children 1 through 6 years. Although the Agency
has concerns when low MOEs are calculated, this tolerance action does
not raise risk concerns. The MOEs are not affected by the rule because
any incremental change in exposure resulting from the tolerances for
pears, nectarines, peaches, and plums is negligible. Thus MOEs are not
changed by the tolerances for these commodities, much less by the
raising of the tolerance from 0.01 ppm to 0.05 ppm. It should also be
noted that the Agency will reassess chlorpyrifos tolerances in general
as part of the reregistration process. The RED is scheduled to be
issued in 1996.
A record has been established for this rulemaking under docket
number [PP 4E4288 and 4E4289/R2198] (including any objections and
hearing requests submitted electronically as described below). A public
version of this record, including printed, paper versions of electronic
comments, which does not include any information claimed as CBI, is
available for inspection from 8 a.m. to 4:30 p.m., Monday through
Friday, excluding legal holidays. The public record is located in Room
1132 of the Public Response and Program Resources Branch, Field
Operations Division (7506C), Office of Pesticide Programs,
Environmental Protection Agency, Crystal Mall #2, 1921 Jefferson Davis
Highway, Arlington, VA.
The official record for this rulemaking, as well as the public
version, as described above will be kept in paper form. Accordingly,
EPA will transfer any copies of objections and hearing requests
received electronically into printed, paper form as they are received
and will place the paper copies in the official rulemaking record which
will also include all comments submitted directly in writing. The
official rulemaking record is the paper record maintained at the
address in ``ADDRESSES'' at the beginning of this document.
Under Executive Order 12866 (58 FR 51735, October 4, 1993), the
Agency must determine whether the regulatory action is ``significant''
and therefore subject to review by the Office of Management and Budget
(OMB) and the requirements of the Executive Order. Under section 3(f),
the order defines ``a significant regulatory action'' as an action that
is likely to result in a rule: (1) Having an annual effect on the
economy of $100 million or more, or adversely and materially affecting
a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local or tribal
governments or communities (also referred to as ``economically
significant''); (2) creating serious inconsistency or otherwise
interfering with an action taken or planned by another agency; (3)
materially altering the budgetary impacts of entitlement, grants, user
fees, or loan programs or the rights and obligations thereof; or (4)
raising novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in this Executive
Order.
Pursuant to the terms of this Executive Order, EPA has determined
that this rule is not ``significant'' and is therefore not subject to
OMB review.
Pursuant to the requirements of the Regulatory Flexibility Act
(Pub. L. 96-354, 94 Stat. 1164, 5 U.S.C. 601-612), the Administrator
has determined that regulations establishing new tolerances or raising
tolerance levels or establishing exemptions from tolerance requirements
do not have a significant economic impact on a substantial number of
small entities. A certification statement to this effect was published
in the Federal Register of May 4, 1981 (46 FR 24950).
List of Subjects in 40 CFR Part 180
Environmental protection, Administrative practice and procedure,
Agricultural commodities, Pesticides and pests, Reporting and
recordkeeping requirements.
Dated: January 24, 1996.
Stephen L. Johnson,
Director, Registration Division, Office of Pesticide Programs.
Therefore, 40 CFR part 180 is amended as follows:
PART 180--[AMENDED]
1. The authority citation for part 180 continues to read as
follows:
Authority: 21 U.S.C. 346a and 371.
2. In Sec. 180.342, by revising paragraph (e), to read as follows:
Sec. 180.342 Chlorpyrifos; tolerances for residues.
* * * * *
(e) Tolerances are established as follows for residues of the
insecticide chlorpyrifos [O,O-diethyl O-(3,5,6-trichloro-2-pyridyl)
phosphorothioate] in or on the following raw agricultural commodities:
------------------------------------------------------------------------
Parts per
Commodity million
------------------------------------------------------------------------
Nectarines................................................. 0.05
Peaches.................................................... 0.05
Pears...................................................... 0.05
Plums...................................................... 0.05
------------------------------------------------------------------------
* * * * *
[FR Doc. 96-1905 Filed 1-26-96; 2:55 pm]
BILLING CODE 6560-50-F
Complete official Federal Register PDF
FR Doc. 96-1882 Regulated Navigation Area: Chesapeake Bay Ice Navigation Season
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Page 3316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1882]
=======================================================================
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DEPARTMENT OF TRANSPORTATION
Coast Guard
33 CFR Part 165
[CGD 05-96-002]
Regulated Navigation Area: Chesapeake Bay Ice Navigation Season
AGENCY: Coast Guard, DOT.
ACTION: Notice of implementation.
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SUMMARY: Coast Guard Captain of the Port (COTP) Baltimore is placing in
effect from January 4, 1996 to April 15, 1996 the Regulated Navigation
Area for the Maryland portion of the Chesapeake Bay, the District of
Columbia, the Potomac River and its tributaries on the Maryland side,
and the Maryland portion of the Chesapeake and Delaware Canal.
Operators of specified vessels are required to contact COTP Baltimore
prior to entering or getting underway within the Regulated Navigation
Area to determine if operating restrictions have been imposed due to
ice conditions.
EFFECTIVE DATES: Section 165.503 of 33 CFR is effective from 12:01
a.m., January 4, 1996 to 12:01 a.m., April 15, 1996, unless sooner
terminated by the Captain of the Port Baltimore by publication of a
notice in the Federal Register.
SUPPLEMENTARY INFORMATION: Call the 24 Hour recorded message at (410)
576-2682, or U.S. Coast Guard Activities Baltimore Duty Officer at
(410) 576-2520 for COTP ice information.
Drafting Information. The drafters of this regulation are
Lieutenant Eric Bautz, project officer, Captain of the Port,
Baltimore, Maryland, and Lieutenant Kathleen A. Duignan, project
attorney, Fifth Coast Guard District Legal Staff.
Discussion
Ice conditions frequently exist during winter months on the
northern portion of Chesapeake Bay and its tributaries, including the
Chesapeake and Delaware Canal. Severe ice conditions may threaten the
safety of persons, vessels and the environment. COTP Baltimore may
issue specific COTP orders imposing operating restrictions due to ice
conditions, vessel construction, and cargo. Mariners are also
encouraged to monitor Broadcast Notices to Mariners to determine if ice
conditions exist in a specific area.
Section 165.503 of 33 CFR establishes a Regulated Navigation Area
(RNA). Operators of vessels carrying oil or hazardous materials in bulk
as cargo or residue, power-driven vessels of three hundred gross tons
or more, vessels of one hundred gross tons or more carrying one or more
passengers for hire, and towing vessels of 26 feet or more in length
must contact COTP Baltimore before entering or getting underway within
the RNA to obtain current COTP orders. Section 165.503 will remain in
effect from January 4, 1996 to April 15, 1996.
Dated: January 3, 1996.
G.S. Cope,
Captain, U.S. Coast Guard, Captain of the Port, Baltimore, Maryland.
[FR Doc. 96-1882 Filed 1-30-96; 8:45 am]
BILLING CODE 4910-14-M
Complete official Federal Register PDF
FR Doc. 96-1859 Truth in Lending
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Page 3177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1859]
=======================================================================
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0915]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of adjustment of dollar amount.
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SUMMARY: The Board is publishing an adjustment to the dollar amount
that triggers certain requirements of Regulation Z (Truth in Lending)
for mortgages bearing fees above a certain amount. The Home Ownership
and Equity Protection Act of 1994 sets forth rules for creditors
offering home-secured loans with total points and fees payable by the
consumer at or before loan consummation that exceed the greater of $400
or 8 percent of the total loan amount. The Board is required to
annually adjust the $400 amount based on the annual percentage change
in the Consumer Price Index as reported on June 1. The Board has
adjusted the dollar amount from $400 to $412.
EFFECTIVE DATE: January 1, 1996.
FOR FURTHER INFORMATION CONTACT: Michael Hentrel, Staff Attorney,
Division of Consumer and Community Affairs, Board of Governors of the
Federal Reserve System, at (202) 452-3667. For the users of
Telecommunications Device for the Deaf only, please contact Dorothea
Thompson at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
Background
The Truth in Lending Act (TILA; 15 U.S.C. 1601--1666j) requires
creditors to disclose credit terms and the cost of consumer credit as
an annual percentage rate. The act requires additional disclosures for
loans secured by a consumer's home, and permits consumers to cancel
certain transactions that involve their principal dwelling. The TILA is
implemented by the Board's Regulation Z (12 CFR part 226).
On March 24, 1995, the Board published amendments to Regulation Z
implementing the Home Ownership and Equity Protection Act of 1994
(HOEPA), contained in the Riegle Community Development and Regulatory
Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160 (60 FR
15463). These amendments, which became effective on October 1, 1995,
are contained in Sec. 226.32 of the regulation and impose new
disclosure requirements and substantive limitations on certain closed-
end mortgage loans bearing rates or fees above a certain percentage or
amount. Creditors are required to comply with the rules in Sec. 226.32
if the total points and fees payable by the consumer at or before loan
consummation exceed the greater of $400 or 8 percent of the total loan
amount. The TILA and Sec. 226.32(a)(1)(ii) of Regulation Z provide that
the $400 figure shall be adjusted annually on January 1 by the annual
percentage change in the Consumer Price Index (CPI) that was reported
on the preceding June 1. See 15 U.S.C. 1602(aa).
The Bureau of Labor Statistics publishes consumer-based indices
monthly, but does not ``report'' a CPI change on June 1; adjustments
are reported in the middle of each month. The CPI-U is based on all
urban consumers and represents approximately 80 percent of the U.S.
population; the CPI-W is based on urban wage earners and clerical
workers and represents about 30 percent of the population. The Board
believes the index representing the broader population of U. S.
consumers--the CPI-U--is the appropriate index to use in any adjustment
to the $400 dollar figure.
The adjustment to the $400 dollar figure reflects the adjustment
reported on May 15 (the rate ``in effect'' on June 1) which states the
percentage increase from April 1994 to April 1995. During that period
the CPI-U increased by 3.1 percent which would cause an adjustment of
the $400 to $412.40. The Board is rounding that number to whole dollars
for ease of compliance.
Adjustment
Effective January 1, 1996, under Sec. 226.32(a), a home mortgage
loan is covered by Sec. 226.32 if the total points and fees payable by
the consumer at or before loan consummation exceed the greater of $412
or 8 percent of the total loan amount. The adjustment will be codified
in the official staff commentary to Regulation Z.
By order of the Board of Governors of the Federal Reserve
System, January 25, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-1859 Filed 1-30-96; 8:45 am]
BILLING CODE 6210-01-P
Complete official Federal Register PDF
FR Doc. 96-1855 Pine Shoot Beetle
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3176-3177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1855]
=======================================================================
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DEPARTMENT OF AGRICULTURE
Animal and Plant Health Inspection Service
7 CFR Part 301
[Docket No. 92-139-9]
Pine Shoot Beetle
AGENCY: Animal and Plant Health Inspection Service, USDA.
ACTION: Affirmation of interim rules as final rule.
-----------------------------------------------------------------------
SUMMARY: We are affirming, without change, the pine shoot beetle
regulations, as established and amended by a series of interim rules
published in the Federal Register between November 1992 and January
1995. The regulations quarantine portions of several States and
restrict the interstate movement of regulated articles from those areas
to prevent the artificial spread of the pine shoot beetle into
noninfested areas of the United States. The pine shoot beetle is a
highly destructive pest of pine trees.
EFFECTIVE DATE: March 1, 1996.
FOR FURTHER INFORMATION CONTACT: Mr. Steve Knight, Senior Operations
Officer, Domestic and Emergency Operations, PPQ, APHIS, 4700 River Road
Unit 134, Riverdale, MD 20737-1236, (301) 734-7935.
SUPPLEMENTARY INFORMATION:
Background
The pine shoot beetle is a highly destructive pest of pine trees.
The pine shoot beetle can cause damage in weak and dying trees, where
reproduction and immature stages of pine shoot beetle occur, and in the
new growth of healthy trees. During ``maturation feeding,'' young
beetles bore up the center of pine shoots (usually of the current
year's growth), causing stunted and distorted growth in the host trees.
The pine shoot beetle is also a vector of several diseases of pine
trees. Adults can fly at least 1 kilometer, and infested trees and pine
products are often transported long distances. This pest damages urban
trees and can cause economic losses to the timber, Christmas tree, and
nursery industries.
Pine shoot beetle hosts include all pine species. The beetle has
been found in a variety of pine species (Pinus spp.) in the United
States. Scotch pine (P. sylvestris) is the preferred host of the pine
shoot beetle.
The Animal and Plant Health Inspection Service (APHIS) established
regulations at 7 CFR 301.50 through 301.50-10 (referred to below as the
regulations) to prevent the artificial spread of the pine shoot beetle
into noninfested areas of the United States.
The regulations were established and refined by a series of interim
rules, beginning with Docket 92-139-1, which was effective on November
13, 1992, and published in the Federal Register on November 19, 1992
(57 FR 54492-54499). Docket 92-139-1 quarantined 42 counties in
Illinois, Indiana, Michigan, New York, Ohio, and Pennsylvania, and
established restrictions on the interstate movement of various
articles, including pine trees, from the quarantined areas. We
solicited comments on the interim rule for 60 days ending January 19,
1993. We received 96 comments by that date from nurseries, Christmas
tree producers, State governments, and others. Nearly all asked us to
ease restrictions by establishing a mechanism for allowing all pine
nursery stock to be certified for interstate movement by visual
inspection.
Docket 92-139-2, effective January 19, 1993, and published in the
Federal Register on January 28, 1993 (58 FR 6346-6348), established the
requested visual inspection protocol for pine nursery stock and
provided an alternative treatment for pine Christmas trees. It also
quarantined one additional county in Illinois. We solicited comments on
the interim rule for 60 days ending March 29, 1993. We received six
comments by that date from a nursery association, State governments,
and others. One simply expressed support; the others encouraged APHIS
to continue to examine treatment and inspection processes.
In response to these comments APHIS continued to examine its
treatment and inspection processes. As a result, Dockets 92-139-3
through 92-139-8 further amended the regulations by removing fir,
larch, and spruce from the list of regulated articles, relieving
certain restrictions on logs and lumber of pine, allowing visual
certification of certain pine transplants, providing a new and less
harsh methyl bromide treatment schedule for cut pine Christmas trees,
and adding pine stumps and pine bark nuggets (including bark chips) to
the list of regulated articles. In addition, these dockets added 8
counties in Illinois, 13 counties in Indiana, 33 counties in Michigan,
10 counties in New York, 4 counties in Ohio, and 7 counties in
Pennsylvania to the list of quarantined areas.
These interim rules were effective and published as follows: Docket
92-139-3, effective May 13, 1993, and published May 13, 1993 (58 FR
28333-28335); Docket 92-139-4, effective June 23, 1993, and published
June 29, 1993 (58 FR 34681-34683); Docket 92-139-5, effective November
23, 1993, and published November 30, 1993 (58 FR 63024-63027); Docket
92-139-6, effective August 1, 1994, and published August 5, 1994 (59 FR
39937-39941); Docket 92-139-7, effective October 14, 1994, and
published October 20, 1994 (59 FR 52891-52894); and Docket 92-139-8,
effective December 29, 1994, and published January 9, 1995 (60 FR 2321-
2323). We solicited comments on each interim rule for 60 days, and
received a total of four comments, three in support and one expressing
concern about enforcement of the regulations. The enforcement concerns
involve the availability of money and persons to enforce the
regulations, and not the need for changes in the regulations.
This document affirms, without change, the pine shoot beetle
regulations, as established and amended by the interim rules listed
above.
This action also affirms the information contained in the interim
rules concerning Executive Orders 12291 and 12866 and the Regulatory
Flexibility Act, Executive Orders 12372 and 12778, and the Paperwork
Reduction Act.
For this action, the Office of Management and Budget has waived the
review process required by Executive Order 12866.
List of Subjects in 7 CFR Part 301
Agricultural commodities, Plant diseases and pests, Quarantine,
[[Page 3177]]
Reporting and recordkeeping requirements, Transportation.
Accordingly, we are adopting as a final rule, without change, the
regulations at 7 CFR 301.50 through 301.50-10, as established and
amended by interim rules published at: 57 FR 54492-54499 on November
19, 1992; at 58 FR 6346-6348 on January 28, 1993; at 58 FR 28333-28335
on May 13, 1993; at 58 FR 34681-34683 on June 29, 1993; at 58 FR 63024-
63027 on November 30, 1993; at 59 FR 39937-39941 on August 5, 1994; at
59 FR 52891-52894 on October 20, 1994; and at 60 FR 2321-2323 on
January 9, 1995.
Authority: 7 U.S.C. 150bb, 150dd, 150ee, 150ff, 161, 162, and
164-167; 7 CFR 2.22, 2.80, and 371.2(c).
Done in Washington, DC, this 25th day of January 1996.
Lonnie J. King,
Administrator, Animal and Plant Health Inspection Service.
[FR Doc. 96-1855 Filed 1-30-96; 8:45 am]
BILLING CODE 3410-34-P
Complete official Federal Register PDF
FR Doc. 96-1848 Approval and Promulgation of Implementation Plans and Designation of Areas for Air Quality Planning Purposes; Ohio
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3319-3326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1848]
-----------------------------------------------------------------------
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Parts 52 and 81
[OH66-1-6499A, OH76-1-6900A; FRL-5405-4]
Approval and Promulgation of Implementation Plans and Designation
of Areas for Air Quality Planning Purposes; Ohio
AGENCY: United States Environmental Protection Agency (USEPA).
ACTION: Direct final rule.
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SUMMARY: The USEPA is approving the State of Ohio's State
Implementation Plan revision request to redesignate the Canton (Stark
County), and Youngstown (Mahoning and Trumbull Counties) marginal ozone
nonattainment areas to attainment, and establish ozone standard
maintenance plans for these areas. Ground-level ozone, commonly known
as smog, is an air pollutant which forms on hot summer days which
harmfully affects lung tissue and breathing passages. The redesignation
to attainment of the health-based ozone air quality standard is based
on a request from the State of Ohio to redesignate this area and
approve its maintenance plan, and on the supporting data the State
submitted in support of the requests. Under the Clean Air Act,
designations can be changed if sufficient data are available to warrant
such change, and a maintenance plan is put in place which is designed
to ensure the area maintains ozone air quality standard for the next
ten years.
[[Page 3320]]
DATES: The ``direct final'' is effective on April 1, 1996, unless USEPA
receives adverse or critical comments by March 1, 1996. If USEPA
receives comments adverse to or critical of the approval discussed
above, USEPA will withdraw this approval before its effective date by
publishing a subsequent Federal Register document which withdraws this
final action. All public comments received will then be addressed in a
subsequent rulemaking document.
ADDRESSES: Copies of the revision request and USEPA's analysis
(Technical Support Document) are available for inspection at the
following address: United States Environmental Protection Agency,
Region 5, Air and Radiation Division, 77 West Jackson Boulevard (AR-
18J), Chicago, Illinois 60604. (It is recommended that you telephone
William Jones at (312) 886-6058, before visiting the Region 5 Office).
Written comments should be sent to: J. Elmer Bortzer, Chief,
Regulation Development Section, Regulation Development Branch (AR-18J),
U.S. Environmental Protection Agency, 77 West Jackson Boulevard,
Chicago, Illinois 60604.
FOR FURTHER INFORMATION CONTACT: William Jones at (312) 886-6058.
SUPPLEMENTARY INFORMATION: Under section 107(d) of the pre-amended
Clean Air Act (CAA), the United States Environmental Protection Agency
(USEPA) promulgated the ozone attainment status for each area of every
State. For Ohio, Canton (Stark County), and Youngstown (Mahoning, and
Trumbull Counties) were designated as a nonattainment area for ozone,
see 43 FR 8962 (March 3, 1978), and 43 FR 45993 (October 5, 1978). On
November 15, 1990, the Clean Air Act Amendments of 1990 were enacted.
Public Law 101-549, 104 Stat. 2399, codified at 42 U.S.C. 7401-7671q.
Pursuant to section 107(d)(1)(C) of the CAA, the Canton and Youngstown
areas retained their designation of nonattainment for ozone by
operation of law, see 56 FR 56694 (November 6, 1991). At the same time
these areas were classified as marginal ozone nonattainment areas based
on design values of 0.135 parts per million (ppm) for Canton, and 0.134
ppm for Youngstown. Design values are based upon actual monitoring data
collected in the area. A design value is calculated for each monitoring
site in the area, with the highest monitor design value being the
design value for the area. A design value for each monitor is usually
the fourth highest reading during a three year period. Generally, the
design value has been set from the years 1987 to 1989. Section 181 of
the CAA provides a table establishing classifications for different
areas based upon area design values. Areas with design values of 0.121
ppm up to 0.138 ppm are classified as marginal nonattainment. Mercer
County, Pennsylvania was also included in the Youngstown-Warren-Sharon
marginal ozone nonattainment area, along with Mahoning and Trumbull
Counties, Ohio. An ozone redesignation request was made by Ohio for
Mahoning and Trumbull Counties, but Pennsylvania has not requested
redesignation of Mercer County. In this case it is appropriate to
proceed with the redesignation of the Ohio portion of this ozone
nonattainment area, because: (1) The entire Youngstown-Warren-Sharon
marginal ozone nonattainment area has attained the ozone National
Ambient Air Quality Standards (NAAQS); and (2) Ohio's maintenance plan
contains triggers that rely on the ozone monitor located in Mercer
County, Pennsylvania.
The Ohio Environmental Protection Agency (OEPA) requested that the
areas be redesignated in letters dated March 25, 1994, (received on
April 5, 1994) and August 15, 1994, (received on August 22, 1994) for
Canton and Youngstown, Ohio, respectively. The public hearing portions
were transmitted to us in letters from Robert Hodanbosi, Chief of the
Division of Air Pollution Control, OEPA, dated August 10, 1994, for
Canton, and November 14, 1994, for Youngstown.
The State provided monitoring, emissions data, and other
documentation to support its redesignation requests. The review
criteria and a review of the requests are provided below.
I. Redesignation Review Criteria
Under the CAA, designations can be changed if sufficient data are
available to warrant such change. The CAA provides the requirements for
redesignating a nonattainment area to attainment. Specifically, section
107(d)(3)(E) provides for redesignation if: (i) The Administrator
determines that the area has attained the NAAQS; (ii) The Administrator
has fully approved the applicable implementation plan for the area
under Section 110(k); (iii) The Administrator determines that the
improvement in air quality is due to permanent and enforceable
reductions in emissions resulting from implementation of the applicable
implementation plan and applicable Federal air pollutant control
regulations and other permanent and enforceable reductions; (iv) The
Administrator has fully approved a maintenance plan for the area as
meeting the requirements of Section 175A; and (v) The State containing
such area has met all requirements applicable to the area under Section
110 and Part D.
The United States Environmental Protection Agency (USEPA) has
provided guidance on processing redesignation requests in the following
memoranda and related documents:
1. Inspection/Maintenance Program Requirement--Provisions for
Redesignation (60 FR 1735), January 5, 1995.
2. ``Part D New Source Review (part D NSR) Requirements for Areas
Requesting Redesignation to Attainment,'' Mary D. Nichols, Assistant
Administrator for Air and Radiation, October 14, 1994.
3. Conformity; General Preamble for Exemption from Nitrogen Oxides
Provisions, General Preamble for Future Proposed Rulemakings (59 FR
31238), June 17, 1994.
4. ``Section 182(f) Nitrogen Oxides (NOx) Exemptions Revised
Process and Criteria,'' John S. Seitz, Director, Office of Air Quality
Planning and Standards, May 27, 1994.
5. ``Maintenance Plan Requirements for Incomplete/No Data Areas,''
Lydia Wegman, Deputy Director, Office of Air Quality Planning and
Standards, May 8, 1994.
6. ``Use of Actual Emissions in Maintenance Demonstrations for
Ozone and Carbon Monoxide (CO) Nonattainment Areas,'' D. Kent Berry,
Acting Director, Air Quality Management Division, November 30, 1993.
7. ``State Implementation Plan (SIP) Requirements for Areas
Submitting Requests for Redesignation to Attainment of the Ozone and
Carbon Monoxide (CO) National Ambient Air Quality Standards (NAAQS) on
or after November 15, 1992,'' Michael H. Shapiro, Acting Assistant
Administrator for Air and Radiation, September 17, 1993.
8. ``Technical Support Document (TSDs) for Redesignating Ozone and
Carbon Monoxide (CO) Nonattainment Areas,'' G. T. Helms, Chief, Ozone/
Carbon Monoxide Programs Branch, August 17, 1993.
9. ``State Implementation Plan (SIP) Actions Submitted in Response
to Clean Air Act (ACT) Deadlines,'' John Calcagni, Director, Air
Quality Management Division, October 28, 1992.
10. ``Procedures for Processing Requests to Redesignate Areas to
Attainment,'' John Calcagni, Director, Air Quality Management Division,
September 4, 1992.
[[Page 3321]]
11. ``Contingency Measures for Ozone and Carbon Monoxide (CO)
Redesignations,'' G.T. Helms, Chief, Ozone/Carbon Monoxide Programs
Branch, June 1, 1992.
II. Review of the Redesignation Requests
The redesignation requests were reviewed to determine if they meet
the criteria for redesignating an area to attainment.
A. The Area Must Have Attained the Ozone NAAQS
For ozone, an area may be considered attaining the NAAQS if there
are no violations, as determined in accordance with the regulation
codified at 40 CFR 50.9, based on the three (3) most recent consecutive
calendar years of quality assured monitoring data. A violation occurs
when the ozone air quality monitoring data show greater than one (1)
average expected exceedance per year. An exceedance occurs when the
maximum hourly ozone concentration exceeds 0.124 parts per million
(ppm). The data should be collected and quality-assured in accordance
with 40 CFR part 58, and recorded in the Aerometric Information
Retrieval System (AIRS) in order for it to be available to the public
for review.
Ambient air quality monitoring data show that these two areas
attained the NAAQS for ozone during the 1989 to 1994 time period, and
preliminary 1995 ozone monitoring data continues to demonstrate both
areas' continued attainment.
The ozone monitoring network for Canton consists of four (4)
monitors. In Canton only one (1) exceedance of the ozone standard has
been monitored since 1990; it was 0.130 ppm and occurred at the North
Canton monitor in 1991. The monitoring network for the Youngstown area
consists of four (4) monitors that are located in Mercer, Mahoning, and
Trumbull Counties. The Youngstown area has monitored several
exceedances since 1990 but is not in violation of the ozone standard.
Preliminary monitoring data for 1995 shows only one exceedance at the
Mahoning County Monitor, which is the first exceedance at that monitor
since 1991. This would not result in a violation.
Data stored in AIRS was used to determine the annual average
expected exceedances for the years 1992, 1993, and 1994. Data contained
in AIRS have undergone quality assurance review by the State and USEPA.
Since the annual average number of expected exceedances for each
monitor during the most recent three years is less than 1.0, the Canton
and Youngstown areas are attaining the standard.
Summaries of air quality data for Canton, and Youngstown are
contained in Tables 1 and 2. The areas are currently meeting the
section 107(d)(3)(E)(i) requirement of attaining the ozone NAAQS.
Table 1.--Peak 1-Hour Ozone Concentrations in the Canton Area 1989 to 1994
----------------------------------------------------------------------------------------------------------------
Exceedances Expected
Site County Year measured exceedances
----------------------------------------------------------------------------------------------------------------
Malone College.............................. Stark........................ 1989 0 0.0
Malone College.............................. Stark........................ 1990 0 0.0
Malone College.............................. Stark........................ 1991 0 0.0
Malone College.............................. Stark........................ 1992 0 0.0
Malone College.............................. Stark........................ 1993 0 0.0
Malone College.............................. Stark........................ 1994 0 0.0
245 W 5th St................................ Stark........................ 1992 0 0.0
245 W 5th St................................ Stark........................ 1993 0 0.0
245 W 5th St................................ Stark........................ 1994 0 0.0
6318 Heminger Av............................ Stark........................ 1989 0 0.0
6318 Heminger Av............................ Stark........................ 1990 0 0.0
6318 Heminger Av............................ Stark........................ 1991 1 1.0
6318 Heminger Av............................ Stark........................ 1992 0 0.0
6318 Heminger Av............................ Stark........................ 1993 0 0.0
6318 Heminger Av............................ Stark........................ 1994 0 0.0
City of Alliance............................ Stark........................ 1991 0 0.0
City of Alliance............................ Stark........................ 1992 0 0.0
City of Alliance............................ Stark........................ 1993 0 0.0
City of Alliance............................ Stark........................ 1994 0 0.0
----------------------------------------------------------------------------------------------------------------
Table 2.--Peak 1-Hour Ozone Concentrations in the Youngstown Area 1989 to 1994
----------------------------------------------------------------------------------------------------------------
Exceedances Expected
Site County Year measured exceedances
----------------------------------------------------------------------------------------------------------------
9 West Front St............................. Mahoning..................... 1989 0 0.0
9 West Front St............................. Mahoning..................... 1990 0 0.0
9 West Front St............................. Mahoning..................... 1991 1 1.0
9 West Front St............................. Mahoning..................... 1992 0 0.0
9 West Front St............................. Mahoning..................... 1993 0 0.0
9 West Front St............................. Mahoning..................... 1994 0 0.0
Airport..................................... Trumbull..................... 1991 0 0.0
Airport..................................... Trumbull..................... 1992 0 0.0
Airport..................................... Trumbull..................... 1993 0 0.0
Airport..................................... Trumbull..................... 1994 0 0.0
Community Hall.............................. Trumbull..................... 1992 0 0.0
Community Hall.............................. Trumbull..................... 1993 1 1.0
Community Hall.............................. Trumbull..................... 1994 0 0.0
City of Farrell............................. Mercer....................... 1989 0 0.0
City of Farrell............................. Mercer....................... 1990 0 0.0
City of Farrell............................. Mercer....................... 1991 0 0.0
[[Page 3322]]
City of Farrell............................. Mercer....................... 1992 0 0.0
City of Farrell............................. Mercer....................... 1993 0 0.0
City of Farrell............................. Mercer....................... 1994 0 0.0
M. K. Goddard State Park.................... Mercer....................... 1989 0 0.0
M. K. Goddard State Park.................... Mercer....................... 1990 0 0.0
M. K. Goddard State Park.................... Mercer....................... 1991 0 0.0
M. K. Goddard State Park.................... Mercer....................... 1992 0 0.0
----------------------------------------------------------------------------------------------------------------
B. The Area Must Have a Fully Approved SIP Under Section 110(k); and
the Area Must Have Met all Applicable Requirements Under Section 110
and Part D
Before the Canton and Youngstown areas may be redesignated to
attainment for ozone, each area must have fulfilled the applicable
requirements of section 110 and part D. USEPA interprets section
107(d)(3)(E)(v) to mean that, for a redesignation request to be
approved, the State must have met all requirements that became
applicable to the subject area prior to or at the time of the
submission of the redesignation request. As the Canton and Youngstown
redesignation requests were submitted to USEPA in March and August
1994, requirements that came due prior to these respective times must
be met for each request to be approved. Requirements of the CAA that
come due subsequent to the submission of the redesignation request
continue to be applicable to the area (see section 175A(c)) and, if the
redesignation is disapproved, the State remains obligated to fulfill
those requirements.
1. Section 110 Requirements
General SIP elements are delineated in section 110(a)(2) of Title
I, Part A. These requirements include but are not limited to the
following: submittal of a SIP that has been adopted by the State after
reasonable notice and public hearing, provisions for establishment and
operation of appropriate apparatus, methods, systems and procedures
necessary to monitor ambient air quality, implementation of a permit
program, provisions for Part C (PSD) and D (NSR) permit programs,
criteria for stationary source emission control measures, monitoring,
and reporting, provisions for modeling, and provisions for public and
local agency participation. For purposes of redesignation, the Ohio SIP
was reviewed to ensure that all requirements under the amended Act were
satisfied.
2. Part D Requirements
Under part D, an area's classification determines the requirements
to which it is subject. Subpart 1 of part D sets forth the basic
nonattainment requirements applicable to all nonattainment areas.
Subpart 2 of part D establishes additional requirements for
nonattainment areas classified under table 1 of section 181(a). As
described in the General Preamble for the Implementation of Title 1,
specific requirements of subpart 2 may override subpart 1's general
provisions (57 FR 13501 (April 16, 1992)). The 1990 Amendments to the
CAA reaffirmed the ozone nonattainment status of the Canton and
Youngstown areas and classified the areas as marginal. Therefore, in
order to be redesignated, the State must meet the applicable
requirements of subpart 1 of part D--as well as the applicable
requirements of subpart 2 of part D that apply to marginal areas such
as Canton and Youngstown.
Section 172(c) sets forth general requirements applicable to all
nonattainment areas. Under section 172(b), the section 172(c)
requirements are applicable as determined by the Administrator, but no
later than 3 years after an area has been designated as nonattainment
under the amended CAA. Furthermore, as noted above, some of these
section 172(c) requirements are superseded by more specific
requirements in subpart 2 of part D. In the cases of Canton and
Youngstown, the State has satisfied all of the section 172(c)
requirements necessary for these areas to be redesignated upon the
basis of the redesignation requests submitted on March 25, 1994, and
August 15, 1994.
In the case of marginal ozone nonattainment areas, the section
172(c)(1) Reasonably Available Control Measures was superseded by
section 182(a)(2) Reasonably Available Control Technology (RACT)
requirements, which required marginal ozone nonattainment areas that
were previously designated nonattainment to submit RACT corrections.
See General Preamble for the Implementation of Title I, 57 FR at 13503,
and the volatile organic compound (VOC) RACT Fix-up rulemaking
published at 58 FR 49458. Thus, for the Canton and Youngstown areas,
the VOC RACT fix-up SIP must be fully approved. The VOC RACT fix-up SIP
previously submitted by Ohio was given partial approval, partial
disapproval, and partial limited approval/limited disapproval. See the
Federal Register rulemaking dated May 9, 1994, at 56 FR 23796. However,
Ohio made a subsequent submittal to address the VOC RACT requirements
for these areas, for which USEPA has published a direct final approval,
along with a proposed approval action. See the direct final and
proposed rulemakings published in the Federal Register on March 23,
1995 (60 FR 15235, and 60 FR 15270). Consequently, the VOC RACT fix-up
requirements have now been fully approved and became effective on May
5, 1995. Also, by virtue of provisions of section 182(a), marginal
areas were not required to submit a demonstration that the SIP provide
for attainment.
With respect to the section 172(c)(2) Reasonable Further Progress
(RFP) requirement, as the Canton and Youngstown areas have attained the
ozone NAAQS no RFP requirements apply. See General Preamble for the
Implementation of title I, 57 FR at 13564.
The section 172(c)(3) emissions inventory requirement was addressed
in a separate review and December 7, 1995, rulemaking action on the
1990 base year inventory required under subpart 2 of part D, section
182(a)(1) (See 60 FR 62737). In that action, the inventory was approved
as meeting the section 182(a)(1) requirement. Since the 182(a)(1)
requirement is met, the 172(c)(3) requirement is also satisfied.
As for the section 172(c)(5) NSR requirement, USEPA has determined
that areas being redesignated need not comply with the NSR requirement
prior to redesignation provided that the area demonstrates maintenance
of the standard without part D NSR in effect.
[[Page 3323]]
A memorandum from Mary Nichols, Assistant Administrator for Air and
Radiation, dated October 14, 1994, entitled Part D New Source Review
(part D NSR) Requirements for Areas Requesting Redesignation to
Attainment, fully describes the rationale for this view, and is based
on the Agency's authority to establish de minimis exceptions to
statutory requirements. See Alabama Power Co. v. Costle, 636 F. 2d 323,
360-61 (D.C. Cir. 1979). As discussed below, the State of Ohio has
demonstrated that the Canton and Youngstown areas will be able to
maintain the standard without part D NSR in effect and, therefore, the
State need not have a fully-approved part D NSR program prior to
approval of the redesignation request for these areas. Once the area is
redesignated to attainment, the PSD program, which has been delegated
to Ohio, will become effective immediately. The PSD program was
delegated to Ohio at Code of Federal Regulations 40 CFR 52.21(u), on
May 1, 1980, and amended November 7, 1988.
The section 172(c)(9) contingency measure requirements also do not
apply to marginal ozone nonattainment areas. Section 182(a) of the CAA
states that section 172(c)(9) (relating to contingency measures) shall
not apply to marginal areas.
Finally, for purposes of redesignation, the Canton and Youngstown
SIPs were reviewed to ensure that all requirements of section
110(a)(2), containing general SIP elements, were satisfied. As noted
above, USEPA believes the SIP satisfies all of those requirements.
Section 176(c) of the Act requires States to revise their SIPs to
establish criteria and procedures to ensure that, before they are
taken, Federal actions conform to the air quality planning goals in the
applicable State SIP. The requirement to determine conformity applies
to transportation plans, programs and projects developed, funded or
approved under Title 23 U.S.C. or the Federal Transit Act
(``transportation conformity''), as well as to all other Federal
actions (``general conformity'').
The USEPA promulgated final transportation conformity regulations
on November 24, 1993 (58 FR 62188) and general conformity regulations
on November 30, 1993 (58 FR 63214). Pursuant to section 51.396 of the
transportation conformity rule and section 51.851 of the general
conformity rule, the State of Ohio is required to submit a SIP revision
containing transportation conformity criteria and procedures consistent
with those established in the Federal rule by November 25, 1994, and
November 30, 1994, respectively. Because the redesignation request was
submitted before these SIP revisions came due, they are not applicable
requirements under section 107(d)(3)(E)(v) for the purposes of
evaluating this redesignation request.
Marginal ozone nonattainment areas are subject to the requirements
of section 182(a) of subpart 2. Ohio has met all of the applicable
requirements of that subsection with respect to the Canton and
Youngstown areas. The emission statement SIP required by section
182(a)(3)(B) was approved on October 13, 1994. See 59 FR 51863. An
Inspection/Maintenance (I/M) SIP was not required under section
182(a)(2)(B) since these areas were not required to have an I/M program
before the enactment of the 1990 CAA Amendments. On September 23, 1993,
the proposed rulemaking on the VOC RACT SIP was published. On May 9,
1994, the final rulemaking was published. This rulemaking gave partial
approval/disapproval, partial limited approval/limited disapproval. A
direct final rulemaking was published on March 23, 1995, providing full
approval of the VOC RACT rules required for Youngstown and Canton. The
emissions inventories were approved in a separate rulemaking, published
on December 7, 1995 (See 60 FR 62737). Finally, the State need not
comply with the requirements of section 182(a)(2)(C) concerning
revisions to the part D NSR program in order for the Canton and
Youngstown areas to be redesignated for the reasons explained above in
connection with the discussion of the section 172(c)(5) NSR
requirement. Since the emissions inventory, emissions statements, and
VOC RACT SIPs are fully approved, the redesignations meet the section
107(d)(3)(E)(ii) and (v) requirements.
C. The Improvement in Air Quality Must be due to Permanent and
Enforceable Reductions in Emissions Resulting From the SIP, Federal
Measures and Other Permanent and Enforceable Reductions
In order to meet this requirement, the State should show the change
in an area's emissions from its design value year (this is generally
1988) to an attainment year. The design value year is the year in which
the monitored concentration, used to classify these areas as marginal,
occurred.
In Canton, point source VOC emissions decreased 2.9 tons per day
(TPD) from 1988 to 1993, due to a State permit controlling emissions at
the Smith & Nephew Perry facility in Massillon. Area sources changed
very little between 1988 and 1993. Mobile source VOC and NOX
decreased 15.0 tons per day (TPD) of VOC, and 1.7 TPD, respectively
from 1988 to 1993. These mobile source emission reductions were due to
Federal Motor Vehicle Emissions Control Program (FMVECP) required at 40
Code of Federal Regulations (CFR) Part 86 and the Federal Reid Vapor
Pressure (RVP) program (which lowered the RVP of gasoline to 9.0 psi)
required at 40 CFR Part 80. Since both these programs are Federal
programs and are Federally enforceable and permanent, the improvement
in Canton's air quality was due to permanent and enforceable reductions
in emissions.
In Youngstown, mobile and point source VOC emissions decreased
approximately 5 TPD, and 1 TPD, respectively, between 1988 and 1990.
The area source emissions were unchanged. This results in a total
change in VOC emissions of approximately 6 TPD (6 percent decrease)
from 1988 to 1990. The majority of this reduction was due to the
FMVECP. Based on this, the improvement in Youngstown's air quality was
due to permanent and enforceable reductions in emissions.
Both the Canton and Youngstown redesignation requests meet the
section 107(d)(3)(E)(iii) redesignation requirements.
D. The Area Must Have a Fully Approved Maintenance Plan Meeting the
Requirements of Section 175A
Section 175A of the CAA sets forth the elements of a maintenance
plan for areas seeking redesignation from nonattainment to attainment.
The maintenance plan is a SIP revision which provides for maintenance
of the relevant NAAQS in the area for at least 10 years after
redesignation. A September 4, 1992, USEPA memorandum from the Director
of the Air Quality Management Division, Office of Air Quality Planning
and Standards, to Directors of Regional Air Divisions regarding
redesignation provides further guidance on the required content of a
maintenance plan.
An ozone maintenance plan should address the following five areas:
the attainment inventory, maintenance demonstration, monitoring
network, verification of continued attainment and a contingency plan.
The attainment emissions inventory identifies the emissions level in
the area which is sufficient to attain the ozone NAAQS, and includes
emissions during the time period which had no monitored violations.
Maintenance is demonstrated by showing that future emissions will
[[Page 3324]]
not exceed the level established by the attainment inventory.
Provisions for continued operation of an appropriate air quality
monitoring network are to be included in the maintenance plan. The
State must show how it will track and verify the progress of the
maintenance plan. Finally, the maintenance plan must include
contingency measures which ensure prompt correction of any violation of
the ozone standard.
The State addresses the attainment inventory, maintenance
demonstration, continued monitoring, tracking plans progress, and the
contingency plan. The State has included emissions summaries for 1990
as the attainment inventories for Canton and Youngstown.
The Canton and Youngstown maintenance plans provide emissions
estimates from 1990 to 2005 for VOCs.1 The emissions are projected
to decrease for both areas. The emissions projections for Youngstown
show an expected 18 percent decrease in total VOC emissions, and almost
a 6 percent decrease in total NOX emissions from 1990 to 2005. For
Canton, the emissions projections show a 15 percent reduction in VOC
emissions and almost a 6 percent reduction in NOX emissions. The
results show that these areas are expected to maintain the ozone air
quality standard for the next 10 years into the future.
\1\ The State used USEPA's MOBILE emission factor model and
vehicle miles travelled projections to estimate future mobile source
emissions in the area.
Table 3.--VOC Emissions in Tons Per Summer Day
----------------------------------------------------------------------------------------------------------------
Point Area Mobile
Year sources sources sources Totals
----------------------------------------------------------------------------------------------------------------
1990............................................................ 12.36 42.65 31.66 86.67
1996............................................................ 13.01 43.25 18.27 74.53
2000............................................................ 13.46 43.67 16.90 74.03
2006............................................................ 14.07 44.20 15.34 73.61
----------------------------------------------------------------------------------------------------------------
Table 4.--NOX VOC Emissions in Tons Per Summer Day
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
1990............................................................ 6.74 16.87 16.20 39.81
1996............................................................ 7.17 17.19 14.20 38.56
2000............................................................ 7.51 17.40 13.18 38.09
2006............................................................ 7.96 17.68 12.00 37.64
----------------------------------------------------------------------------------------------------------------
Emissions summaries for VOCs and NOX are provided below for
the Youngstown area:
Table 5.--VOC Emissions in Tons Per Summer Day
------------------------------------------------------------------------
Point Area Mobile
Year sources sources sources Totals
------------------------------------------------------------------------
1990........................ 16.71 41.28 48.98 106.97
1996........................ 16.38 41.21 31.27 88.86
2000........................ 15.90 41.14 27.58 84.62
2005........................ 15.42 41.11 24.33 80.86
------------------------------------------------------------------------
Table 6.--NOX Emissions in Tons Per Summer Day
------------------------------------------------------------------------
Point Area Mobile
Year sources sources sources Totals
------------------------------------------------------------------------
1990........................ 23.25 17.99 29.87 71.11
1996........................ 23.30 17.90 27.54 68.74
2000........................ 23.36 17.79 24.11 65.26
2005........................ 23.46 17.70 21.12 62.28
------------------------------------------------------------------------
The State also commits to continuing the operation of the monitors
in both areas. It will also track the maintenance of the areas by
regularly updating the emissions inventories for the areas. The
transportation conformity budgets for 2005 will be 32.16 TPD of VOC and
27.30 TPD of oxides of nitrogen (NOX) for Youngstown. These
budgets were chosen by the State of Ohio. The interim years do not set
a budget for transportation conformity. They are based on allocating 30
percent of the VOC emissions safety margin to the mobile source sector
and 70 percent of the NOX emissions safety margin to the mobile
sources sector. The safety margin is the difference in emissions
between the total 2006 emissions and the 1990 emissions for VOC and
NOX. For Canton, the mobile source emissions budgets for 2006 are
15.34 TPD of VOC emissions and 12.0 TPD of NOX. The budgets
provided above for Canton and Youngstown are the only transportation
conformity budgets established by the maintenance plan for these areas.
[[Page 3325]]
The State commits to lower RVP as the contingency measure for
Canton. They also provided the following schedule in Table 4 for
implementing the measure. This measure would be triggered in Canton by
a violation of the ozone standard in Stark County. In order for the
State to user lower RVP gasoline, a finding of necessity must first be
made by USEPA under Section 211(c)(4)(C). If this finding of necessity
is not provided, Ohio EPA has committed to choose an alternative
unspecified emissions control measure deemed appropriate based upon a
consideration of cost-effectiveness, VOC reduction potential, economic
and social considerations, or other factors that the State judges to be
appropriate. This decision would be made and implemented within 12
months from the official notification by USEPA that a waiver would not
be granted.
In the Youngstown area a violation of the standard in Mahoning,
Trumbull, or Mercer County, would trigger the lower RVP measure for
Mahoning and Trumbull Counties. USEPA has to provide a waiver before
the lower RVP measure can be implemented. The State will select a
different measure if USEPA does not provide the waiver. The maintenance
requirements of section 107(d)(3)(E)(iv) have been met by the Canton
and Youngstown areas.
Table 7.--Schedule for Implementing Lower RVP Gasoline in the Canton and
Youngstown Areas
------------------------------------------------------------------------
Date Action/event
------------------------------------------------------------------------
March 15, 1994......................... Submit draft rules to USEPA.
Revisions will be necessary to
accommodate the Youngstown
contingency plan.
October 15, 1994....................... Submit final rules to USEPA.
Trigger event.......................... Monitored violation.
1 month from trigger................... Ohio EPA finding of violation
announced.
Ohio EPA submits request for
program budget.
Ohio EPA hires additional staff
for program.
2 months from trigger.................. Ohio EPA secures lab contracts.
3 months from trigger.................. Ohio EPA purchases needed
equipment.
4 months from trigger.................. Ohio EPA initiates public
awareness program.
Ohio EPA secures lab contracts.
Six months from trigger................ Gasoline Dispensing Facilities
achieve final compliance.
------------------------------------------------------------------------
III. Transport of Ozone Precursors to Downwind Areas
Preliminary modeling results utilizing USEPA's regional oxidant
model (ROM) indicate that ozone precursor emissions from various states
west of the ozone transport region (OTR) contribute to increases in
ozone concentrations in the OTR.\2\ The State of Ohio has provided
documentation that VOC emissions will remain below attainment levels
for the next 10 years in the Canton and Youngstown areas. The USEPA is
currently developing policy which will address the long range impacts
of ozone transport. In addition, USEPA is working with the States and
other organizations to design and complete studies which consider
upwind sources and quantify their impacts. Finally, USEPA intends to
address the transport issue through Section 110 based on a domain-wide
modeling analysis.
\2\ The OTR, comprised of eleven Eastern States and the District
of Columbia, has been organized by the authority of section 184(a)
of the CAA for the purpose of facilitating multi-State partnership
to more effectively control ozone transport in the region.
---------------------------------------------------------------------------
IV. Comment and Approval Procedure
The redesignation request is approved as meeting conditions of the
CAA in section 107(d)(3)(E) for redesignation.
The USEPA is publishing this action without prior proposal because
USEPA views this action as a noncontroversial revision and anticipates
no adverse comments. However, USEPA is publishing a separate document
in this Federal Register publication, which constitutes a ``proposed
approval'' of the requested SIP revision and clarifies that the
rulemaking will not be deemed final if timely adverse or critical
comments are filed. The ``direct final'' approval shall be effective on
April 1, 1996, unless USEPA receives adverse or critical comments by
March 1, 1996. If USEPA receives comments adverse to or critical of the
approval discussed above, USEPA will withdraw this approval before its
effective date by publishing a subsequent Federal Register document
which withdraws this final action. All public comments received will
then be addressed in a subsequent rulemaking document. Any parties
interested in commenting on this action should do so at this time. If
no such comments are received, USEPA hereby advises the public that
this action will be effective on April 1, 1996.
This action has been classified as a Table 3 action for signature
by the Regional Administrator under the procedures published in the
Federal Register on January 19, 1989 (54 FR 2214-2225), as revised by a
July 10, 1995, memorandum from Mary Nichols, Assistant Administrator
for Air and Radiation. The Office of Management and Budget (OMB) has
exempted this regulatory action from Executive Order 12866 review.
Nothing in this action should be construed as permitting, allowing,
or establishing a precedent for any future request for revision to any
SIP. USEPA shall consider each request for revision to the SIP in light
of specific technical, economic, and environmental factors and in
relation to relevant statutory and regulatory requirements.
Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded
Mandates Act'') (signed into law on March 22, 1995) requires that the
USEPA prepare a budgetary impact statement before promulgating a rule
that includes a Federal mandate that may result in expenditure by
State, local, and tribal governments, in aggregate, or by the private
sector, of $100 million or more in any one year. Section 203 requires
the USEPA to establish a plan for obtaining input from and informing,
educating, and advising any small governments that may be significantly
or uniquely affected by the rule.
Under section 205 of the Unfunded Mandates Act, the USEPA must
identify and consider a reasonable number of regulatory alternatives
before promulgating a rule for which a budgetary impact statement must
be prepared. The USEPA must select from those alternatives the least
costly, most cost-effective, or least burdensome alternative that
achieves the objectives of the rule, unless the USEPA explains why this
alternative is not selected or the selection of this alternative is
inconsistent with law.
Because this final rule is estimated to result in the expenditure
by State, local,
[[Page 3326]]
and tribal governments or the private sector of less then $100 million
in any one year, the USEPA has not prepared a budgetary impact
statement or specifically addressed the selection of the least costly,
most cost-effective, or least burdensome alternative. Because small
governments will not be significantly or uniquely affected by this
rule, the USEPA is not required to develop a plan with regard to small
governments. This rule only approves the incorporation of existing
state rules into the SIP. It imposes no additional requirements.
Under the Regulatory Flexibility Act, 5 U.S.C. 600 et seq., USEPA
must prepare a regulatory flexibility analysis assessing the impact of
any proposed or final rule on small entities. (5 U.S.C. 603 and 604.)
Alternatively, USEPA may certify that the rule will not have a
significant impact on a substantial number of small entities. Small
entities include small businesses, small not-for-profit enterprises,
and government entities with jurisdiction over populations of less than
50,000.
SIP approvals under section 110 and subchapter I, part D of the
Clean Air Act do not create any new requirements, but simply approve
requirements that the State is already imposing. Therefore, because the
Federal SIP-approval does not impose any new requirements, I certify
that it does not have a significant impact on any small entities
affected. Moreover, due to the nature of the Federal-State relationship
under the Act, preparation of a regulatory flexibility analysis would
constitute Federal inquiry into the economic reasonableness of the
State action. The Clean Air Act forbids USEPA to base its actions
concerning SIPs on such grounds. Union Electric Co. v. USEPA., 427 U.S.
246, 256-66 (S.Ct. 1976); 42 U.S.C. 7410(a)(2).
Under section 307(b)(1) of the Clean Air Act, petitions for
judicial review of this action must be filed in the United States Court
of Appeals for the appropriate circuit by April 1, 1996. Filing a
petition for reconsideration by the Administrator of this final rule
does not affect the finality of this rule for the purposes of judicial
review nor does it extend the time within which a petition for judicial
review may be filed, and shall not postpone the effectiveness of such
rule or action. This action may not be challenged later in proceedings
to enforce its requirements. (See Section 307(b)(2)).
List of Subjects
40 CFR Part 52
Environmental protection, Air pollution control, Intergovernmental
relations, Ozone.
40 CFR Part 81
Air pollution control.
Dated: December 15, 1995.
Valdas V. Adamkus,
Regional Administrator.
Chapter I, title 40 of the Code of Federal Regulations is amended
as follows:
PART 52--[AMENDED]
1. The authority citation for part 52 continues to read as follows:
Authority: 42 U.S.C. 7401-7671q.
2. Section 52.1885 is amended by adding paragraphs (b) (7) and (8)
to read as follows:
Sec. 52.1885 Control strategy: Ozone.
* * * * *
(b) * * *
(7) Stark County.
(8) Mahoning and Trumbull Counties.
* * * * *
PART 81--DESIGNATION OF AREAS FOR AIR QUALITY PURPOSES--OHIO
1. The authority citation for part 81 continues to read as follows:
Authority: 42 U.S.C. 7401--7671q.
2. In Sec. 81.336 the ozone table is amended by revising the
entries for Stark, Mahoning, and Trumbull Counties to read as follows:
Sec. 81.336 Ohio.
* * * * *
Ohio--Ozone
----------------------------------------------------------------------------------------------------------------
Designation Classification
Designated area -------------------------------------------------------------------------
Date\1\ Type Date\1\ Type
----------------------------------------------------------------------------------------------------------------
* * * * * *
*
Canton Area ........................ ........................
Stark County........................ April 1, 1996........... Attainment..............
* * * * * *
*
Youngstown-Warren-Sharon Area: ........................ ........................
Mahoning County..................... April 1, 1996........... Attainment..............
Trumbull County..................... April 1, 1996........... Attainment..............
* * * * * *
*
----------------------------------------------------------------------------------------------------------------
\1\This date is November 15, 1990, unless otherwise noted.
[FR Doc. 96-1848 Filed 1-30-96; 8:45 am]
BILLING CODE 6560-50-P
Complete official Federal Register PDF
FR Doc. 96-1837 Approval and Promulgation of Implementation Plans Tennessee: Approval of Revisions to Process Emission Standards for New and Existing Cotton Gins
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3318-3319]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1837]
-----------------------------------------------------------------------
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 52
[TN-154-7092a; FRL-5328-7]
Approval and Promulgation of Implementation Plans Tennessee:
Approval of Revisions to Process Emission Standards for New and
Existing Cotton Gins
AGENCY: Environmental Protection Agency (EPA).
ACTION: Direct final rule.
-----------------------------------------------------------------------
SUMMARY: EPA is approving revisions to the Tennessee State
Implementation Plan (SIP) submitted by the State of Tennessee through
the Tennessee Department of Environment and Conservation on April 18,
1995. This submittal included revisions to the current regulations
concerning process emission standards for new and existing cotton gins.
These revisions also provide an optional method of using selected
controls to demonstrate compliance with the emission standards.
DATES: This final rule is effective April 1, 1996 unless adverse or
critical comments are received by March 1, 1996. If the effective date
is delayed, timely notice will be published in the Federal Register.
ADDRESSES: Written comments on this action should be addressed to Karen
Borel, at the EPA Regional Office listed below. Copies of the documents
relative to this action are available for public inspection during
normal business hours at the following locations. The interested
persons wanting to examine these documents should make an appointment
with the appropriate office at least 24 hours before the visiting day.
Air and Radiation Docket and Information Center (Air Docket 6102), U.S.
Environmental Protection Agency, 401 M Street, SW, Washington, DC 20460
Environmental Protection Agency, Region 4 Air Programs Branch, 345
Courtland Street, NE, Atlanta, Georgia 30365
Tennessee Department of Environment and Conservation, Division of Air
Pollution Control, 9th Floor L & C Annex, 401 Church Street, Nashville,
Tennessee 37243-1531.
FOR FURTHER INFORMATION CONTACT: Interested persons wanting to examine
documents relative to this action should make an appointment with the
Region 4 Air Programs Branch at least 24 hours before the visiting day.
To schedule the appointment or to request additional information,
contact Karen C. Borel, Regulatory Planning and Development Section,
Air Programs Branch, Air, Pesticides & Toxics Management Division,
Region 4 EPA, 345 Courtland Street, NE, Atlanta, Georgia 30365. The
telephone number is 404/347-3555 extension 4197. Reference file TN154-
01-7092.
SUPPLEMENTARY INFORMATION: On April 18, 1995, the State of Tennessee
through the Tennessee Department of Environment and Conservation
submitted a revision to their SIP incorporating changes to regulations
for new and existing cotton gins. The SIP revision consists of changes
to Paragraph 1200-3-7-.08(3). EPA is approving these revisions which
are summarized as follows.
1. Subparagraph 1200-3-7-.08(3)(a) has been revised. This
subparagraph has been amended to add definitions for the following
items: ``Cotton Gins;'' ``Cotton Gin Site or Gin Site;'' ``High
Efficiency Cyclone;'' ``Low Pressure Exhausts;'' ``High Pressure
Exhaust;'' and ``Dust House.'' The former subparagraph prohibited ``the
emission of particulate matter in any on hour in excess of * * *
amount shown in Table 4'' and has been deleted. This requirement was
incorporated into Subparagraph 1200-3-7-.08(3)(b).
2. Subparagraph 1200-3-7-.08(3)(b) has been revised. This paragraph
has been amended by deleting the former language that allowed the total
process weight from all similar units at a plant to be used to
determine the maximum allowable emission of particulate matter from a
stack. This has been replaced by the requirements that the owner or
operator of the cotton gin meet the standards set forth in Table 4 of
this paragraph. Table 4 establishes the allowable rate of particulate
emissions based on the process weight rate for new and existing cotton
gins. These allowable emission rates have not been amended. This
revised subparagraph alternatively allows the owner or operator of a
cotton gin to utilize defined control devices, rather than
demonstrating compliance with the emission standards. The control
devices which are allowed include screens with a mesh size of 80 by 80
or finer, or perforated condenser drums with holes of .045 inches in
diameter or less, or dust houses for emission control from low pressure
exhausts. For emission control from high pressure exhausts, high
efficiency cyclones may be used to demonstrate compliance. Subparagraph
1200-3-7-.08(3)(b) has also been amended to prohibit the burning of
cotton gin waste at a gin site in a wigwam or any other type of
enclosed burner.
3. Subparagraph 1200-3-7-.08(3)(c) has been revised. The former
subparagraph required compliance by January 1, 1973, or July 1, 1975.
This language was deleted. The new compliance date for this regulation
has been included in subparagraph (b), above, and is now July 1, 1991.
The revised paragraph (c) now states that the ``allowable particulate
emission standards for * * * cotton gins shall be determined by Table
4.'' This language was contained in subparagraph (a) prior to this SIP
revision.
4. Table 4, subparagraph 1200-3-7-.08(3), has been revised. The
title of this table has been modified from ``Allowable Particulate
Emission Based on Process Weight Rate for Cotton Gins'' to ``Allowable
Rate of Particulate Emissions Based on Process Weight Rate for New and
Existing Cotton Gins.'' The address for the Tennessee Division of Air
Pollution Control has also been updated.
Final Action
EPA is approving the aforementioned revisions contained in the
State's April 18, 1995, submittal. The EPA is publishing this
rulemaking without prior proposal because the Agency views this as a
noncontroversial amendment and anticipates no adverse comments.
However, in a separate document in this Federal Register publication,
the EPA is proposing to approve the SIP revision should adverse or
critical comments be filed. This action will be effective April 1,
1996, unless, within 30 days of its publication, adverse or critical
comments are received.
If the EPA receives such comments, this action will be withdrawn
before the effective date by publishing a
[[Page 3319]]
subsequent document that will withdraw the final action. All public
comments received will then be addressed in a subsequent final rule
based on the separate proposed rule. The EPA will not institute a
second comment period on this action. Any parties interested in
commenting on this action should do so at this time. If no such
comments are received, the public is advised that this action will be
effective April 1, 1996.
Under section 307(b)(1) of the Clean Air Act (CAA), 42 U.S.C.
7607(b)(1), petitions for judicial review of this action must be filed
in the United States Court of Appeals for the appropriate circuit by
April 1, 1996. Filing a petition for reconsideration by the
Administrator of this final rule does not affect the finality of this
rule for purposes of judicial review nor does it extend the time within
which a petition for judicial review may be filed, and shall not
postpone the effectiveness of such rule or action. This action may not
be challenged later in proceedings to enforce its requirements. (See
section 307(b)(2) of the CAA, 42 U.S.C. 7607(b)(2).)
This action has been classified as a Table 3 action for signature
by the Regional Administrator under the procedures published in the
Federal Register on January 19, 1989 (54 FR 2214-2225), as revised by a
July 10, 1995, memorandum from Mary Nichols, Assistant Administrator
for Air and Radiation. The Office of Management and Budget (OMB) has
exempted this regulatory action from E.O. 12866 review.
Nothing in this action shall be construed as permitting or allowing
or establishing a precedent for any future request for a revision to
any state implementation plan. Each request for revision to the state
implementation plan shall be considered separately in light of specific
technical, economic, and environmental factors and in relation to
relevant statutory and regulatory requirements.
Under the Regulatory Flexibility Act, 5 U.S.C. 600 et seq., EPA
must prepare a regulatory flexibility analysis assessing the impact of
any proposed or final rule on small entities. 5 U.S.C. 603 and 604.
Alternatively, EPA may certify that the rule will not have a
significant impact on a substantial number of small entities. Small
entities include small businesses, small not-for-profit enterprises,
and government entities with jurisdiction over populations of less than
50,000.
SIP approvals under section 110 and subchapter I, part D of the CAA
do not create any new requirements, but simply approve requirements
that the State is already imposing. Therefore, because the Federal SIP-
approval does not impose any new requirements, I certify that it does
not have a significant impact on any small entities affected. Moreover,
due to the nature of the Federal-state relationship under the CAA,
preparation of a regulatory flexibility analysis would constitute
Federal inquiry into the economic reasonableness of state action. The
CAA forbids EPA to base its actions concerning SIPs on such grounds.
Union Electric Co. v. U.S. E.P.A., 427 U.S. 246, 256-66 (S.Ct. 1976);
42 U.S.C. Sec. 7410(a)(2) and 7410(k)(3).
Under sections 202, 203, and 205 of the Unfunded Mandates Reform
Act of 1995 (``Unfunded Mandates Act''), signed into law on March 22,
1995, EPA must undertake various actions in association with proposed
or final rules that include a Federal mandate that may result in
estimated costs of $100 million or more to the private sector, or to
State, local, or tribal governments in the aggregate.
Through submission of this state implementation plan or plan
revision, the State and any affected local or tribal governments have
elected to adopt the program provided for under section 110 of the CAA.
These rules may bind State, local and tribal governments to perform
certain actions and also require the private sector to perform certain
duties. EPA has examined whether the rules being approved by this
action will impose no new requirements, since such sources are already
subject to these regulations under State law. Accordingly, no
additional costs to State, local, or tribal governments, or to the
private sector, result from this action. Therefore this final action
does not include a mandate that may result in estimated costs of $100
million or more to State, local, or tribal governments in the aggregate
or to the private sector.
List of Subjects in 40 CFR Part 52
Environmental protection, Air pollution control, Incorporation by
reference, Particulate matter, Reporting and recordkeeping
requirements.
Dated: October 17, 1995.
Patrick M. Tobin,
Acting Regional Administrator.
Part 52 of chapter I, title 40, Code of Federal Regulations, is
amended as follows:
PART 52--[AMENDED]
1. The authority citation for part 52 continues to read as follows:
Authority: 42.U.S.C. 7401-7671q.
Subpart RR--Tennessee
2. Section 52.2220, is amended by adding paragraph (c)(127) to read
as follows:
Sec. 52.2220 Identification of plan.
* * * * *
(c) * * *
(127) Revisions to the State of Tennessee Air Pollution Control
Regulations submitted by the Tennessee Department of Environment and
Conservation on April 18, 1995. These consist of revisions to the
process emission standards for new and existing cotton gins. These
revised regulations also provide an optional method of using selected
controls to demonstrate compliance with the emission standards.
(i) Incorporation by reference.
(A) Tennessee Division of Air Pollution Control Regulations,
Chapter 1200-3-7-.08(3) effective July 16, 1990.
(ii) Other material. None.
* * * * *
[FR Doc. 96-1837 Filed 1-30-96; 8:45 am]
BILLING CODE 6560-50-P
Complete official Federal Register PDF
FR Doc. 96-1836 Prevailing Rate Systems; Abolishment of Franklin, OH, Nonappropriated Fund Wage Area
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3175-3176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1836]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 61, No. 21 / Wednesday, January 31, 1996 /
Rules and Regulations
[[Page 3175]]
OFFICE OF PERSONNEL MANAGEMENT
5 CFR Part 532
RIN 3206-AH29
Prevailing Rate Systems; Abolishment of Franklin, OH,
Nonappropriated Fund Wage Area
AGENCY: Office of Personnel Management.
ACTION: Interim rule with request for comments.
-----------------------------------------------------------------------
SUMMARY: The Office of Personnel Management is issuing an interim rule
to abolish the Franklin, OH, nonappropriated fund (NAF) Federal Wage
System (FWS) wage area and redefine the five counties having continuing
FWS employment as areas of application to the Greene-Montgomery, OH,
NAF wage area for pay-setting purposes. Those five counties include
three Ohio counties (Franklin, Licking, and Ross) and two West Virginia
counties (Raleigh and Wayne).
DATES: This interim rule becomes effective on January 31, 1996.
Comments must be received by March 1, 1996. Employees currently paid
rates from the Franklin, OH, NAF wage schedule will continue to be paid
from that schedule until their conversion to the Greene-Montgomery, OH,
NAF wage schedule 1 day prior to the effective date of the next Greene-
Montgomery, OH, wage schedule.
ADDRESSES: Send or deliver comments to Donald J. Winstead, Assistant
Director for Compensation Policy, Human Resources Systems Service, U.S.
Office of Personnel Management, Room 6H31, 1900 E Street NW.,
Washington, DC 20415, or FAX: (202) 606-0824.
FOR FURTHER INFORMATION CONTACT:
Paul Shields, (202) 606-2848.
SUPPLEMENTARY INFORMATION: The Department of Defense (DOD) recommended
to the Office of Personnel Management that the Franklin, OH, FWS NAF
wage area be abolished and that the five counties having continuing FWS
employment be added as areas of application to the Greene-Montgomery,
OH, NAF wage area. Those five counties include three Ohio counties
(Franklin, Licking, and Ross) and two West Virginia counties (Raleigh
and Wayne). The remaining Franklin wage area county (Cabell County, WV)
is being deleted because it has no FWS employment. This change is
necessary because the pending closure of the wage area host activity,
Newark Air Force Base, leaves the Franklin wage area without an
activity having the capability to conduct a wage survey.
As required in regulation, 5 CFR 532.219, the following criteria
were considered in redefining these wage areas:
(1) Proximity of largest activity in each county;
(2) Transportation facilities and commuting patterns; and
(3) Similarities of the counties in:
(i) Overall population;
(ii) Private employment in major industry categories; and
(iii) Kinds and sizes of private industrial establishments.
For Franklin County, proximity and transportation facilities and
commuting patterns strongly favor Greene-Montgomery. The third
criterion, similarities of the counties, is not definitive. For each of
the three factors in this criterion, Franklin falls between the more
populous Allegheny, PA, and the two less populous areas, Greene-
Montgomery and Hardin-Jefferson, KY.
For Ross County, all three criteria favor Greene-Montgomery.
For Licking County, proximity and similarities of the counties
strongly favor Greene-Montgomery. Transportation facilities and
commuting patterns slightly favor Allegheny (23 commuters to Allegheny
versus 20 commuters to Greene-Montgomery).
Raleigh County is a little closer to Allegheny, 372 kilometers (231
miles), than it is to Greene-Montgomery, 433 kilometers (269 miles).
With no commuters to the survey areas under consideration, the second
criterion does not distinguish between them. The third criterion,
similarities of the counties, strongly favors Greene-Montgomery.
For Wayne County, both proximity and similarities of the counties
favor Greene-Montgomery. The transportation facilities and commuting
patterns criterion does not distinguish among the options because there
are no commuters to the counties in question.
The Federal Prevailing Rate Advisory Committee reviewed this
recommendation and by consensus recommended approval.
Pursuant to 5 U.S.C. 553(b)(3)(B), I find that good cause exists
for waiving the general notice of proposed rulemaking. Also, pursuant
to section 553(d)(3) of title 5, United States Code, I find that good
cause exists for making this rule effective in less than 30 days. The
notice is being waived and the regulation is being made effective in
less than 30 days because preparations for the 1996 Franklin, OH, NAF
wage area survey must otherwise begin immediately.
Regulatory Flexibility Act
I certify that these regulations will not have a significant
economic impact on a substantial number of small entities because they
affect only Federal agencies and employees.
List of Subjects in 5 CFR Part 532
Administrative practice and procedure, Freedom of information,
Government employees, Reporting and recordkeeping requirements, Wages.
Office of Personnel Management
Lorraine A. Green,
Deputy Director.
Accordingly, OPM is amending 5 CFR part 532 as follows:
PART 532--PREVAILING RATE SYSTEMS
1. The authority citation for part 532 continues to read as
follows:
Authority: 5 U.S.C. 5343, 5346; Sec. 532.707 also issued under 5
U.S.C. 552.
Appendix B to Subpart B of Part 532--[Amended]
2. In Appendix B to subpart B, the listing for the State of Ohio is
amended by removing the entry for Franklin.
3. Appendix D to subpart B is amended by removing the wage area
list for Franklin, Ohio, and by revising the list for Greene-
Montgomery, Ohio, to read as follows:
[[Page 3176]]
Appendix D to Subpart B of Part 532--Nonappropriated Fund Wage and
Survey Areas
* * * * *
Ohio
* * * * *
Greene-Montgomery
Survey Area
Ohio:
Greene
Montgomery
Area of application. Survey area plus:
Ohio:
Clinton
Franklin (Effective date March 8, 1996)
Hamilton
Licking (Effective date March 8, 1996)
Ross (Effective date March 8, 1996)
West Virginia:
Raleigh (Effective date March 8, 1996)
Wayne (Effective date March 8, 1996)
* * * * *
[FR Doc. 96-1836 Filed 1-30-96; 8:45 am]
BILLING CODE 6325-01-M
Complete official Federal Register PDF
FR Doc. 96-1831 Organization and Delegation of Powers and Duties Delegation to the Commandant, United States Coast Guard
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3331-3332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1831]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
49 CFR Part 1
[OST Docket No. 1; Amdt. 1-276]
Organization and Delegation of Powers and Duties Delegation to
the Commandant, United States Coast Guard
agency: Office of the Secretary, DOT.
action: Final rule.
-----------------------------------------------------------------------
summary: The Secretary of Transportation is delegating to the
Commandant, United States Coast Guard, the authority contained in 46
U.S.C. Chapter 47, abandonment of barges, and Sec. 12301(b), numbering
of undocumented barges. In order that the Code of Federal Regulations
reflect these delegations, a change is necessary.
effective date: January 31, 1996.
for further information contact: LT Chris Hayes, Office of Marine
Safety, Security and Environmental Protection (G-MRO-3), (202) 267-
2614, U.S. Coast Guard, 2100 Second Street, SW., Washington, DC 20593;
or Steven B. Farbman, Office of the Assistant General Counsel for
Regulation and Enforcement, C-50, (202) 366-9307, Department of
Transportation, 400 Seventh Street, SW., Washington, DC 20590.
[[Page 3332]]
supplementary information: Public Law 102-587 is The Oceans Act of
1992. Subtitle C of Title V of The Oceans Act of 1992, titled the
Abandoned Barge Act of 1992, (hereinafter referred to as the Act),
amended 46, U.S. Code, to prohibit abandonment of barges, to provide a
civil penalty for abandonment, to authorize removal, and to require the
numbering of barges. The Secretary of Transportation is delegating his
authority under the Act to the Commandant of the Coast Guard.
The Act prohibits an owner or operator of a barge over 100 gross
tons from abandoning it on the navigable waters of the United States.
The Act authorizes the Secretary to assess a civil penalty of up to
$1,000 per day of abandonment. If the barge owner or operator cannot be
identified or refuses to remove the barge, the Secretary may contract
for removal of the barge at the expense of the owner or operator. To
help identify barge owners, the Secretary is required to ensure the
numbering of all undocumented barges over 100 gross tons.
This rule adds a specific delegation of authority to 49 CFR
Sec. 1.46, thus amending the codification to reflect the Secretarial
delegation of authority to the Commandant of the Coast Guard.
Since this amendment relates to departmental management,
organization, procedure, and practice, notice and comment on it are
unnecessary and it may be made effective in fewer than 30 days after
publication in the Federal Register. Therefore, this final rule is
effective upon publication in the Federal Register.
List of Subjects in 49 CFR Part 1
Authority delegations (Government agencies), Organization and
functions (Government agencies).
In consideration of the foregoing, Part 1 of Title 49, Code of
Federal Regulations, is amended as follows:
PART 1--[AMENDED]
1. The authority citation for Part 1 continues to read as follows:
Authority: 49 U.S.C. 322; Pub. L. 101-552, 28 U.S.C. 2672, 31
U.S.C. 3711(a)(2).
2. Section 1.46 is amended by adding a new paragraph (zz) to read
as follows:
Sec. 1.46 Delegations to Commandant of the Coast Guard.
* * * * *
(zz) Carry out the functions and exercise the authority vested in
the Secretary by 46 U.S. Code Chapter 47 (abandonment of barges) and
Sec. 12301(b) (numbering of undocumented barges), as enacted by the
Oceans Act of 1992, Title V, section 5301 et seq., Pub. L. No. 102-587,
106 Stat. 5081. This authority may be redelegated.
Issued at Washington, DC this 23rd day of January, 1996.
Federico Pena,
Secretary of Transportation.
[FR Doc. 96-1831 Filed 1-30-96; 8:45 am]
BILLING CODE 4910-62-M
Complete official Federal Register PDF
FR Doc. 96-1719 1-[[2-(2,4-Dichlorophenyl)-4-Propyl-1,3-Dioxolan-2-yl]Methyl]-1H- 1,2,4-Triazole; Pesticide Tolerances
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3326-3328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1719]
-----------------------------------------------------------------------
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 180
[PP 2E4037 and 5E4437/R2195; FRL-4993-1]
RIN 2070-AB78
1-[[2-(2,4-Dichlorophenyl)-4-Propyl-1,3-Dioxolan-2-yl]Methyl]-1H-
1,2,4-Triazole; Pesticide Tolerances
AGENCY: Environmental Protection Agency (EPA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This rule establishes tolerances for residues of the fungicide
1-[[2-(2,4-dichlorophenyl)-4-propyl-1,3-dioxolan-2yl]methyl]-1H-1,2,4-
triazole (also called propiconazole) and its metabolites determined as
2,4-dichlorobenzoic acid and expressed as parent compound in or on the
raw agricultural commodities mint tops (leaves and stems) at 0.3 part
per
[[Page 3327]]
million (ppm) and mushrooms at 0.1 ppm. The Interregional Research
Project No. 4 (IR-4) submitted petitions under the Federal Food, Drug
and Cosmetic Act (FFDCA) requesting that EPA establish maximum
permissible levels for residues of propiconazole in or on the
commodities.
EFFECTIVE DATE: This regulation becomes effective January 31, 1996.
ADDRESSES: Written objections and hearing requests, identified by the
document control number, [PP 2E4037 and 5E4437/R2195], may be submitted
to: Hearing Clerk (1900), Environmental Protection Agency, Rm. M3708,
401 M St., SW., Washington, DC 20460. A copy of any objections and
hearing requests filed with the Hearing Clerk should be identified by
the document control number and submitted to: Public Response and
Program Resources Branch, Field Operations Division (7506C), Office of
Pesticide Programs, Environmental Protection Agency, 401 M St., SW.,
Washington, DC 20460. In person, bring copy of objections and hearing
requests to Rm. 1132, CM 1B2, 1921 Jefferson Davis Hwy., Arlington, VA
22202. Fees accompanying objections shall be labeled ``Tolerance
Petition Fees'' and forwarded to: EPA Headquarters Accounting
Operations Branch, OPP (Tolerance Fees), P.O. Box 360277M, Pittsburgh,
PA 15251.
An electronic copy of objections and hearing requests filed with
the Hearing Clerk may be submitted to OPP by sending electronic mail
(e-mail) to:
[email protected]
Copies of electronic objections and hearing requests must be
submitted as an ASCII file avoiding the use of special characters and
any form of encryption. Copies of electronic objections and hearing
requests will also be accepted on disks in WordPerfect 5.1 file format
or ASCII file format. All copies of electronic objections and hearing
requests must be identified by the docket number [PP 2E4037 and 5E4437/
R2195] . No Confidential Business Information (CBI) should be submitted
through e-mail. Copies of electronic objections and hearing requests on
this rule may be filed online at many Federal Depository Libraries.
Additional information on electronic submissions can be found below in
this document.
FOR FURTHER INFORMATION CONTACT:By mail: Hoyt L. Jamerson, Registration
Division (7505W), Office of Pesticide Programs, Environmental
Protection Agency, 401 M St., SW., Washington, DC 20460. Office
location and telephone number: Rm. 207, CM #2, 1921 Jefferson Davis
Hwy., Arlington, VA 22202, (703)-308-8783; e-mail:
[email protected].
SUPPLEMENTARY INFORMATION: EPA issued a proposed rule, published in the
Federal Register of November 15, 1995 (60 FR 57375), which announced
that the Interregional Research Project No. 4 (IR-4), New Jersey
Agricultural Experiment Station, P.O. Box 231, Rutgers University, New
Brunswick, NJ 08903, had submitted to EPA pesticide petitions, PP
2E4037 and PP 5E4437, on behalf of the named Agricultural Experiment
Stations. The petitions requested that the Administrator, pursuant to
section 408(e) of th Federal Food, Drug and Cosmetic Act (FFDCA), 21
U.S.C. 346a(e), amend 40 CFR 180.434 by establishing tolerances for
residues of 1-[[2-(2,4-dichlorophenyl)-4-propyl-1,3-dioxolan-
2yl]methyl]-1H-1,2,4-triazole and its metabolites determined as 2,4-
dichlorobenzoic acid and expressed as parent compound in or on certain
raw agricultural commodities as follows:
1. PP 2E4037. Petition submitted on behalf of the Agricultural
Experiment Station of Oregon proposing a tolerance for mint tops
(leaves and stems) at 0.3 ppm. The petitioner proposed that use of
propiconazole on mint be limited to mint production areas west of the
Cascade Mountains based on the geographical representation of the
residue data submitted. Additional residue data will be required to
expand the area of usage. Persons seeking broader registration should
contact the Agency's Registration Division at the address provided
above.
2. PP 5E4437. Petition submitted on behalf of the Agricultural
Experiment Station of Pennsylvania proposing a tolerance for mushrooms
at 0.1 ppm.
There were no comments or requests for referral to an advisory
committee received in response to the proposed rule.
The data submitted with the proposal and other relevant material
have been evaluated and discussed in the proposed rule. Based on the
data and information considered, the Agency concludes that the
tolerances will protect the public health. Therefore, the tolerances
are established as set forth below.
Any person adversely affected by this regulation may, within 30
days after publication of this document in the Federal Register, file
written objections to the regulation and may also request a hearing on
those objections. Objections and hearing requests must be filed with
the Hearing Clerk, at the address given above (40 CFR 178.20). A copy
of the objections and/or hearing requests filed with the Hearing Clerk
should be submitted to the OPP docket for this rulemaking. The
objections submitted must specify the provisions of the regulation
deemed objectionable and the grounds for the objections (40 CFR
178.25). Each objection must be accompanied by the fee prescribed by 40
CFR 180.33(i). If a hearing is requested, the objections must include a
statement of the factual issue(s) on which a hearing is requested, the
requestor's contentions on such issues, and a summary of any evidence
relied upon by the objector (40 CFR 178.27). A request for a hearing
will be granted if the Administrator determines that the material
submitted shows the following: There is genuine and substantial issue
of fact; there is a reasonable possibility that available evidence
identified by the requestor would, if established, resolve one or more
of such issues in favor of the requestor, taking into account
uncontested claims or facts to the contrary; and resolution of the
factual issue(s) in the manner sought by the requestor would be
adequate to justify the action requested (40 CFR 178.32).
EPA has established a record for this rulemaking under docket
number [PP 2E4037 and 5E4437/R2195] (including any comments and data
submitted electronically). A public version of this record, including
printed, paper versions of electronic comments, which does not include
any information claimed as CBI, is available for inspection from 8 a.m.
to 4:30 p.m., Monday through Friday, excluding legal holidays. The
public record is located in Room 1132 of the Public Response and
Program Resources Branch, Field Operations Division (7506C), Office of
Pesticide Programs, Environmental Protection Agency, Crystal Mall 1B2,
1921 Jefferson Davis Highway, Arlington, VA.
Electronic comments may be sent directly to EPA at:
[email protected].
Electronic comments must be submitted as an ASCII file avoiding the
use of special characters and any form of encryption.
The official record for this rulemaking, as well as the public
version, as described above will be kept in paper form. Accordingly,
EPA will transfer any copies of objections and hearing requests
received electronically into printed, paper form as they are received
and will place the paper copies in the official rulemaking record which
will also include all comments submitted directly in writing. The
official rulemaking record is the paper record maintained at the
address in
[[Page 3328]]
ADDRESSES at the beginning of this document.
Under Executive Order 12866 (58 FR 51735, October 4, 1993), the
Agency must determine whether the regulatory action is ``significant''
and therefore subject to all the requirements of the Executive Order
(i.e., Regulatory Impact Analysis, review by the Office of Management
and Budget (OMB)). Under section 3(f), the order defines
``significant'' as those actions likely to lead to a rule (1) having an
annual effect on the economy of $100 million or more, or adversely and
materially affecting a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local or tribal governments or communities (also known as
``economically significant''); (2) creating serious inconsistency or
otherwise interfering with an action taken or planned by another
agency; (3) materially altering the budgetary impacts of entitlement,
grants, user fees, or loan programs; or (4) raising novel legal or
policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in this Executive Order.
Pursuant to the terms of this Executive Order, EPA has determined
that this rule is not ``significant'' and is therefore not subject to
OMB review.
Pursuant to the requirements of the Regulatory Flexibility Act
(Pub. L. 96-354, 94 Stat. 1164, 5 U.S.C. 601-612), the Administrator
has determined that regulations establishing new tolerances or raising
tolerance levels or establishing exemptions from tolerance requirements
do not have a significant economic impact on a substantial number of
small entities. A certification statement to this effect was published
in the Federal Register of May 4, 1981 (46 FR 24950).
List of Subjects in 40 CFR Part 180
Environmental protection, Administrative practice and procedure,
Agricultural commodities, Pesticides and pests, Reporting and
recordkeeping requirements.
Dated: January 23, 1996.
Stephen L. Johnson.
Director, Registration Division, Office of Pesticide Programs.
Therefore, 40 CFR part 180 is amended as follows:
PART 180--[AMENDED]
1. The authority citation for part 180 continues to read as
follows:
Authority: 21 U.S.C. 346a and 371.
2. In Sec. 180.434, paragraph (a) is amended in the table therein
by adding and alphabetically inserting an entry for mushrooms, and
paragraph (b) is amended in the table therein by adding and
alphabetically inserting an entry for mint, to read as follows:
Sec. 180.434 1-[[2-(2,4-dichlorophenyl)-4-propyl-1,3-dioxolan-2-
yl]methyl]-1H-1,2,4-triazole; tolerances for residues.
(a) * * *
------------------------------------------------------------------------
Parts per
Commodity million
------------------------------------------------------------------------
* * * * *
Mushrooms.................................................. 0.1
* * * * *
------------------------------------------------------------------------
(b) * * *
------------------------------------------------------------------------
Parts per
Commodity million
------------------------------------------------------------------------
* * * * *
Mint, tops (leaves and stems).............................. 0.3
* * * * *
------------------------------------------------------------------------
* * * * *
[FR Doc. 96-1719 Filed 1-30-96; 8:45 am]
BILLING CODE 6560-50-F
Complete official Federal Register PDF
FR Doc. 96-1710 National Oil and Hazardous Substances Contingency Plan; National Priorities List Update
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3330-3331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1710]
-----------------------------------------------------------------------
[[Page 3331]]
ENVIRONMENTAL PROTECTION AGENCY
[FRL-5406-7]
40 CFR Part 300
National Oil and Hazardous Substances Contingency Plan; National
Priorities List Update
AGENCY: Environmental Protection Agency (EPA).
ACTION: Notice of Deletion of the Ossineke Groundwater Contamination
Superfund Site from the National Priorities List (NPL).
-----------------------------------------------------------------------
SUMMARY: The Environmental Protection Agency (EPA) announces the
deletion of the Ossineke Groundwater Contamination site in Michigan
from the National Priorities List (NPL). The NPL is Appendix B of 40
CFR part 300 which is the National Oil and Hazardous Substances
Contingency Plan (NCP), which EPA promulgated pursuant to Section 105
of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA), as amended. EPA and the State of
Michigan have determined that all appropriate Fund-financed responses
under CERCLA have been implemented and that no further response by
responsible parties under CERCLA is appropriate. The site is being
addressed under the Subtitle I provisions of RCRA.
EFFECTIVE DATE: January 31, 1996.
FOR FURTHER INFORMATION CONTACT: Rita Garner-Davis at (312) 886-2440,
Associate Remedial Project Manager, Office of Superfund, U.S. EPA--
Region V, 77 West Jackson Blvd., Chicago, IL 60604. Information on the
site is available at: EPA Region V docket room at the above address and
at the Alpenda Bank; 11686 U.S. Highway 23 south; Ossineke, MI 49766.
SUPPLEMENTARY INFORMATION: The site to be deleted from the NPL is the
Ossineke Groundwater Contamination Site in Ossineke, Michigan. A Notice
of Intent to Delete was published August 11, 1995 (60 FR 41051) for
this site. The closing date for comments on the Notice of Intent to
Delete was September 11, 1995. EPA received no comments.
The EPA identifies sites which appear to present a significant risk
to public health, welfare, or the environment and it maintains the NPL
as the list of those sites. Sites on the NPL may be the subject of
Hazardous Substance Response Trust Fund (Fund-) financed remedial
actions. Any site deleted from the NPL remains eligible for Fund-
financed remedial actions in the unlikely event that conditions at the
site warrant such action. Section 300.425(e)(3) of the NCP states that
Fund-financed actions may be taken at sites deleted from the NPL in the
unlikely event that conditions at the site warrant such action.
Deletion of a site from the NPL does not affect responsible party
liability or impede Agency efforts to recover costs associated with
response efforts.
List of Subjects in 40 CFR Part 300
Environmental protection, Hazardous Waste, Chemicals, Hazardous
substances, Reporting and recordkeeping requirements, Superfund, Water
pollution control, Water supply.
PART 300--[AMENDED]
1. The authority citation for part 300 continues to read as
follows:
Authority: 33 U.S.C. 1321(c)(2); 42 U.S.C. 9601-9657; E.O.
12777, 56 FR 54757, 3 CFR, 1991 Comp., p. 351; E.O. 12580, 52 FR
2923, 3 CFR, 1987 Comp., p. 193.
Appendix B--[Amended]
2. Table 1 of appendix B to part 300 is amended by removing the
Ossineke Ground Water Contamination, Ossineke, Michigan.
Dated: December 19, 1995.
David Ullrich,
Acting Regional Administrator U.S. EPA, Region V.
[FR Doc. 96-1710 Filed 1-30-96; 8:45 am]
BILLING CODE 6560-50-P
Complete official Federal Register PDF
FR Doc. 96-1553 Protection of Stratospheric Ozone
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3316-3318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1553]
=======================================================================
-----------------------------------------------------------------------
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 82
[FRL-5406-3]
Protection of Stratospheric Ozone
AGENCY: Environmental Protection Agency (EPA).
ACTION: Notice of stay and reconsideration.
-----------------------------------------------------------------------
SUMMARY: This action announces a three-month stay and reconsideration
of
[[Page 3317]]
a certain reporting requirement in the petition process for the import
of used class I controlled substances promulgated under sections 604
and 606 of the Clean Air Act Amendments of 1990. The effectiveness of
40 CFR 82.13(g)(2)(viii), that requires the importer to certify that
the purchaser of the controlled substance is liable for the tax, is
stayed for three months pending reconsideration. The EPA is issuing
this stay pursuant to section 307(d)(7)(B) of the Clean Air Act, which
provides the Administrator authority to stay the effectiveness of a
rule during reconsideration.
In the proposed rules Section of today's Federal Register document,
EPA is proposing to extend this stay to the extent necessary to
complete reconsideration (including any appropriate regulatory action)
of the rule in question.
DATES: Effective January 31, 1996, 40 CFR 82.13(g)(2)(viii) is stayed
until April 30, 1996.
ADDRESSES: Comments and materials supporting this rulemaking are
contained in Public Docket No. A-92-13, Waterside Mall (Ground Floor)
Environmental Protection Agency, 401 M Street, SW., Washington, DC
20460 in room M-1500. Dockets may be inspected from 8 a.m. until 5:30
p.m., Monday through Friday. A reasonable fee may be charged for
copying docket materials.
FOR FURTHER INFORMATION CONTACT: Tom Land, Stratospheric Protection
Division, Office of Air and Radiation, U.S. Environmental Protection
Agency (6205-J), 401 M Street, SW., Washington, DC 20460, (202) 233-
9185. The Stratospheric Ozone Information Hotline at 1-800-296-1996 can
also be contacted for further information.
SUPPLEMENTARY INFORMATION:
I. Background
II. Rules to be Stayed
III. Issuance of Stay
IV. Authority for Stay and Reconsideration
V. Proposed Additional Temporary Stay
VI. Effective Date
I. Background
On May 31, 1995, PAACO International, Inc., an importer of used
class I controlled ozone-depleting substances, sent to the United
States Environmental Protection Agency (EPA) a petition for
reconsideration of one reporting requirement in the petition process
for the import of used class I controlled substances. This reporting
requirement is included as Sec. 82.13(g)(2)(viii) in the amendment to
the Accelerated Phaseout Rule promulgated on May 10, 1995 (60 FR
24970). The provision requires an importer to certify that the
purchaser of the used substances is liable for the excise tax. By this
action, EPA is convening a proceeding for reconsideration.
II. Rules to be Stayed and Reconsidered
EPA proposed amendments to the accelerated phaseout regulation in
the Federal Register on November 10, 1994. In the proposal, EPA
discussed options for addressing the illegal import of controlled
substances that are mislabelled as being previously used. EPA viewed
the potential for mislabelling virgin ozone-depleting substances as
``used'' as a possible loophole in the controls on imports. The
controls on imports are established in the phaseout regulation in
accordance with United States' obligations under the Montreal Protocol
and as required by the Clean Air Act Amendments of 1990 (CAAA) in
Section 604(c). The final rule amending the accelerated phaseout
regulation was published in the Federal Register on May 10, 1995, and
established a petition process for the import of used class I
controlled substances in Sec. 82.13(g)(2). A person wishing to import
used class I controlled substances is required to submit a petition to
EPA at least 15 working-days before the shipment is to leave the port
of export. The petition must provide specific information to allow EPA
to independently verify that the material was in fact previously used.
Section 82.13(g)(2)(viii) requires the person submitting the petition
to certify that the purchaser of the used substances is liable for the
tax.
The petitioners stated as the basis for their request for the stay
and reconsideration that EPA did not give public notice of this
requirement and therefore it was ``impracticable to raise objections''
to the provision during the public comment period. The petitioner also
claimed that the objections are of central relevance to the rule
because it believes that ``purchasers'' are not liable for the tax, it
could not certify liability, and it could not conduct its business
under the rule.
Today's action stays the requirement in Sec. 82.13(g)(2)(viii)
regarding certification of liability for the tax. EPA recognizes that
the proposed rule did not discuss the possibility of a certification of
liability for taxes. The Agency has completed a preliminary review of
PAACO's information and will reconsider the need to include such a
requirement.
III. Issuance of Stay
EPA hereby issues a three-month administrative stay of the
effectiveness of Sec. 82.13(g)(2)(viii), including all applicable
compliance dates (60 FR 25001). EPA will reconsider this rule, as
discussed above and, following the notice and comment procedures of
section 307(d) of the Clean Air Act, will take appropriate action.
If the reconsideration results in provisions for the import of used
class I controlled substances that are stricter than the existing rule,
EPA will propose an adequate compliance period from the date of final
action on reconsideration. EPA will seek to ensure that the affected
parties are not unduly prejudiced by the Agency's reconsideration.
IV. Authority for Stay and Reconsideration
The administrative stay and reconsideration of the rule and
associated compliance period announced by this notice are being
undertaken pursuant to section 307(d)(7)(B) of the Clean Air Act, 42
U.S.C. 7607(d)(7)(B). That provision authorizes the Administrator to
stay the effectiveness of a rule for three months in order to consider
a request for reconsideration. The issues in the petition for
reconsideration were impracticable to raise during the comment period,
and are of central relevance to the outcome of this provision of the
rule.
V. Proposed Additional Temporary Stay
Because EPA may not be able to complete the reconsideration
(including any appropriate regulatory action) of the rule stayed by
this document within the three-month period expressly provided in
section 307(d)(7)(B), in the Proposed Rules Section of today's Federal
Register, EPA proposes a temporary extension of the stay beyond the
three months provided, only to the extent necessary to complete
reconsideration of the rule in question.
I certify that this stay of a reporting requirement for a petition
to import used controlled substances will not have any additional
negative economic imports on any small entities.
VI. Effective Date
This action is effective on January 31, 1996.
List of Subjects in 40 CFR Part 82
Environmental protection, Administrative practice and procedure,
Air pollution control, Chemicals, Chlorofluorocarbons, Exports,
Hydrochlorofluorocarbons, Imports,
[[Page 3318]]
Interstate commerce, Nonessential products, Reporting and recordkeeping
requirements, Stratospheric ozone layer.
Dated: January 11, 1996.
Carol M. Browner,
Administrator.
Part 82, chapter I, title 40, of the code of Federal Regulations,
is amended as follows:
PART 82--PROTECTION OF STRATOSPHERIC OZONE
1. The authority citation for part 82 continues to read as follows:
Authority: 42 U.S.C. 7414, 7601, 7671-7671q.
2. Section 82.13 is amended by January 31, 1996 staying paragraph
(g)(2)(viii) from until April 30, 1996.
[FR Doc. 96-1553 Filed 1-31-96; 8:45 am]
BILLING CODE 6560-50-P
Complete official Federal Register PDF
FR Doc. 96-1432 Business Loan Programs
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3226-3266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1432]
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 108, 116, 120, 122, 131
Business Loan Programs
Agency: Small Business Administration (SBA).
Action: Final rule.
-----------------------------------------------------------------------
Summary: SBA has completed an extensive review of all of its
regulations, and it has decided to eliminate some regulations and
consolidate, clarify, and simplify the remainder. This final rule
consolidates five current CFR parts into one Part to be known as Part
120. This surviving Part 120 covers virtually all policies and
regulations, other than size standards, applicable to SBA's business
(non-disaster) loan programs. Almost all provisions have been reworded,
renumbered, and relocated. There are a few new or revised policies.
Several sections have been deleted. However, most of the revisions
merely streamline and clarify the regulations and do not represent
substantive change.
DATES: This rule is effective March 1, 1996. This rule applies with
respect to all applications for financial assistance filed on or after
March 1, 1996.
[[Page 3227]]
FOR FURTHER INFORMATION CONTACT: John R. Cox, (202) 205-6490.
SUPPLEMENTARY INFORMATION: On December 15, 1995, SBA published in the
Federal Register (60 FR 64356) a notice of proposed rulemaking with
respect to the consolidation of five current CFR parts into one Part to
be known as Part 120. SBA received and considered 136 timely comments
in response to the proposed rule. SBA has adopted many of the comments
in issuing this final rule. Each of the significant comments is
addressed below. In addition, SBA has made technical changes and
clarifications in this final rule, where appropriate.
This final rule combines Parts 108, 116, 120, 122 and 131 of 13 CFR
into one new Part to be known as Part 120. This new Part 120 will
regulate all of SBA's non-disaster financial assistance to small
businesses under its general business loan program (``7(a) loans''),
its microloan demonstration program (``Microloans''), and its
development company program (``504 loans'').
Many repetitive and overlapping sections from the current
regulations are eliminated in this final rule. Formerly, provisions
applicable to a business loan program were often located in different
Parts. Sometimes unintended differences developed between the loan
programs in the interpretation or implementation of similar program
policies because of minor inconsistencies in the language of the
provisions in the several Parts. These inconsistencies have been
eliminated.
In this final rule, the basic requirements that apply to all of the
business loan programs are located in subpart A. These include elements
currently found in portions of Parts 108, 116 and 120. Policies
specific to a particular program are in the separate subpart applying
to that program. Rules specific to 7(a) loans are in subpart B and
include elements currently in portions of Parts 116, 120, and 122.
Regulations applying to SBA's special purpose loans currently in Part
122 and a portion of Part 116 are in Subpart C. Subparts D, E, and F
contain rules regarding lenders, program administration, and the
secondary market currently found in Part 120. The loan moratorium
provisions presently in Part 131 are located in subpart E. Subpart G
contains rules specific to Microloans currently in Part 122.
Regulations applying to 504 loans currently located in Part 108 are in
subpart H.
Definitions
Many comments were received which addressed the definition of
Associate in Sec. 120.10. Most commenters expressed the opinion that
the definition was too broad and, if promulgated, would adversely
affect the ability of small businesses to use SBA's lending programs.
Of particular concern was the inclusion of a ``Close Relative'' of a
principal of an entity in the definition of Associate of a small
business, Lender or CDC. As a result of the comments, SBA re-examined
this definition and modified it. An Associate of a Lender or CDC will
include a holder of 20 percent or more of the value of a Lender's or
CDC's stock or debt instruments, as well as an entity in which the
Close Relative of an Officer, Director, key employee, or holder of at
least a 20 percent interest in the Lender or CDC. The definition of an
Associate of a small business was amended to include an owner of more
than 20 percent of the equity of the small business, but not an entity
in which a Close Relative of such an owner is also an owner.
Subpart A
Numerous commenters indicated that Sec. 120.101, pertaining to the
unavailability of credit, needed clarification with respect to the
substantiation required to support a Lender's or CDC's certification.
SBA is promulgating this section as proposed because it plans to
provide information on how to provide the required substantiation in
its Standard Operating Procedures (SOPs).
Proposed Sec. 120.102, which imposed a requirement that the
personal resources of the owners of an applicant for a business loan be
injected into the applicant generated more than 80 comments from the
public. The overwhelming majority of the responses objected to the
application of a personal resources test to the 504 program because
that program is an economic development program. After considering the
responses received, SBA has revised the final rule to require an
injection of personal resources at a level dependent on the amount of a
total financing package which includes an SBA business loan. This means
that the injection of personal resources will bear a designated
correlation to the total financing package of SBA and non-SBA
assistance. This regulation will ensure that applicants for SBA
financial assistance will be able to ascertain the demand on their
personal resources, with some certainty, before they seek SBA financial
assistance.
Section 120.110 lists types of businesses which are not eligible
for SBA financial assistance. Several commenters suggested SBA further
explain when a business is engaged in a religious activity for purposes
of ineligibility under Sec. 120.110(k), and to eliminate the proposed
requirement that a business be principally engaged in the activity. SBA
has decided to retain the prohibition on providing assistance to a
business principally engaged in a religious activity. SBA believes that
this standard comports with Constitutional requirements. SBA intends to
administer the standard in a manner which balances the needs of small
businesses with applicable legal requirements. However, given the
uncertainty of the state of legal precedent relative to the
Establishment Clause, SBA will continue to review this issue, and may
make such prospective changes in the regulation as may be required.
In addition, for purposes of consistency SBA will use a standard of
no more than one-third of gross annual revenue derived from the
prescribed activity to determine the eligibility of businesses engaged
in legal gambling activities or packaging SBA loans for purposes of
Secs. 120.110 (g) and (m).
Proposed Sec. 120.111 would permit an Eligible Passive Company to
be eligible for 7(a) and 504 loan assistance if it leases real or
personal property to an otherwise eligible small business. SBA received
many comments suggesting that it permit a revocable or irrevocable
trust to be such an entity. SBA has decided to delete the requirement
that when a trust is an Eligible Passive Company it must be an
irrevocable trust in favor of one permitting eligibility for revocable
trusts in prescribed circumstances. In order to be eligible, the
trustor must warrant and certify that the trust will not be revoked or
substantially amended without SBA's consent, and the trustor's personal
guarantee will be required to provide adequate assurances of continuity
and financial support. SBA will monitor its experience with revocable
trusts and make modification to this provision if such experience
warrants it.
Under current rules, an Eligible Passive Company may not use the
proceeds of a business loan for working capital. Only an active company
may obtain working capital as part of a business loan. SBA recognizes
that this requirement has been burdensome and has caused some
applicants to obtain two separate loans for the benefit of the same
Operating Company. Accordingly, Sec. 120.120(b) will allow an Eligible
Passive Company to use part of business loan funds for the working
capital of the Operating Company if the Operating Company is a co-
Borrower.
With respect to proposed Sec. 120.195, which required the reporting
of fees
[[Page 3228]]
paid in connection with obtaining business loan assistance by a Lender,
CDC, Intermediary Lender, and Borrower, SBA has decided to retain only
a requirement relating to the Borrower since other regulations cover
the obligation by the other parties to report fees. By eliminating a
reference to other parties, SBA avoids unnecessary duplication.
Subpart B
Proposed Sec. 120.200 specified that bonding is required as
collateral for a 7(a) loan in which construction is financed. Two
commenters recommended that a minimum amount of construction should be
designated in Sec. 120.200 before payment and performance bonds and
builder's risk insurance would be required. Another commenter expressed
concern that the proposed regulation would require formal waivers of
bonding and insurance requirements on a case-by-case basis. Another
comment noted that the revised provision does not appear to cover
direct loans approved by SBA. SBA has made minor changes in the
language of the provision to clarify that the provision covers direct
and guaranteed loans. SBA has decided not to establish a specific size
limit on the construction project which would trigger the bonding and
insurance requirements, electing instead to address the specific
construction project size in an SOP.
One commenter suggested that the proposed revised language in
Sec. 120.201 was so restrictive as to disqualify any refinancing of
unsecured or undersecured debt regardless of circumstances. That was
not the intent of the proposal. However, the final regulation specifies
that SBA will not permit 7(a) financing to be used to shift a
creditor's potential loss to SBA.
SBA has decided to delete proposed Sec. 120.203 relating to
revolving credit, as unnecessary. Revolving line of credit financing is
currently authorized under Sec. 120.390 for the CapLines program, and
the Agency wants the flexibility to consider special finance needs of
small business, such as ``floor plan'' financing, at a later date.
With respect to proposed Sec. 120.213, SBA carefully considered
suggestions to add language to the regulation pertaining to preemptive
federal interest rates and the quarterly publication by SBA of maximum
allowable fixed interest rates in the Federal Register. SBA has decided
that it is unnecessary to address in the regulations the legal
conclusion that maximum interest rates prescribed by SBA are exempt by
statute from any maximum rates established under state law. It is SBA's
intent to publish on a quarterly basis in the Federal Register notice
of the maximum fixed interest rate permitted on guaranteed and direct
loans. The final rule retains the language in the proposed rule.
Proposed Sec. 120.214(f) has been rewritten in order to clarify
that SBA has the authority to establish higher interest for smaller
loans, and that the authority applies to both variable and fixed rate
loans. The proposal has been finalized at Sec. 120.215. Proposed
Sec. 120.214(g), has been renumbered and is now Sec. 120.214(f).
A number of commenters suggested that SBA should amend proposed
Sec. 120.220(b), claiming that the policy of terminating a guarantee
for nonpayment of the guarantee fee is too harsh. SBA has considered
the comments, but has decided to retain the present policy of
terminating guarantees for nonpayment of guarantee fees as one means of
assuring timely submission of guarantee fees. In addition, under the
Lender's agreement with SBA, payment of the guarantee fee is the
consideration necessary to support SBA's guarantee commitment. Minor
editorial changes have been made in this section to reflect that a
guarantee fee payment may be reimbursed to the Lender from funds
allocated in the working capital portion of a guaranteed loan.
Two commenters suggested that SBA should clarify in Sec. 120.220(c)
that the annual fee payable by a Lender cannot be charged to a
Borrower. SBA has adopted the suggestion.
SBA has deleted proposed Sec. 120.221(b), relating to commitment
fees for Export Working Capital loans. This provision was based on the
former Export Revolving Line of Credit program and is no longer
applicable to any program.
A commenter suggested that SBA define the term ``Extraordinary
servicing'' as proposed in Sec. 120.221(c). SBA believes that any
further description of special or extraordinary servicing practices
would be more appropriate for its SOPs, and therefore declines to adopt
the suggestion. The suggestion to permit prepayment fees, which were
prohibited under proposed Sec. 120.221(e), has not been adopted by SBA.
The Agency believes that a small business should be allowed to prepay a
7(a) loan without incurring additional costs, and the prohibition on
charging prepayment fees is a positive marketing tool for making 7(a)
financial assistance available to small business.
SBA has added referral fees to the list of fees in Sec. 120.222(b)
which a Lender or Associate may not charge a Borrower since such fees
are not fees which relate to services normally provided by a Lender.
SBA has included a Service Provider as an entity in Sec. 120.222(d)
with which a Lender or Associate cannot share a premium received from
the sale of an SBA guaranteed loan in the secondary market. The
inclusion of a Service Provider in the prohibition reduces further the
possibility of a conflict of interest or the appearance thereof.
Subpart C
Two commenters noted that under the provisions of proposed
Sec. 120.314, SBA was precluded from requiring personal guarantees for
DAL-2 financial assistance. SBA intended the prohibition for requiring
personal guarantees to be applicable only to DAL-1 financial
assistance, and the provision has been corrected to reflect that
intent.
One commenter suggested that SBA should state in the provisions
pertaining to the Export Working Capital Program (EWCP) that limits on
lender fees and interest rates are not prescribed. In final
Sec. 120.344, SBA has addressed the issue of extraordinary fees and
interest rates pertaining to the EWCP. SBA does not set a maximum rate
of interest which may be charged for this program.
At the suggestion of a commenter, the reference to loan proceeds to
develop or penetrate foreign markets has been deleted from Sec. 120.342
and moved to Sec. 120.347, pertaining to eligible use of proceeds for
International Trade Loans. EWCP loan proceeds are to be used only to
finance export transactions.
Two commenters noted that proposed Sec. 120.348 did not address a
limitation on the fixed-asset portion of International Trade Loans. The
provision has been amended to specify limitations on portions of loan
amounts allocated for fixed assets and non-fixed assets.
At the suggestion of one commenter, SBA has clarified Sec. 120.377
to provide that only a manufacturing concern may use loan proceeds for
working capital for this particular loan program.
Two commenters suggested SBA should address the DELTA loan program
in Sec. 120.380. While the DELTA loan program is not a permanently
funded SBA program, SBA has elected to briefly describe it in
Sec. 120.381(c).
Subpart D
Although Sec. 120.420, which allows nondepository lenders to pledge
notes evidencing SBA guaranteed loans or to sell the unguaranteed
portions is not new, two commenters asked that depository lenders be
allowed the same
[[Page 3229]]
option. SBA has rejected this suggestion. This option is not available
to depository lenders because they have a depository base which
provides liquidity, whereas the nondepository lenders have no such
base. They have only a capital base which must be left unimpaired. To
provide them with some liquid assets, SBA allows them to sell the
unguaranteed portions of SBA guaranteed loans.
Two commenters wrote that a conflict exists between
Secs. 120.420(a) and 120.453(c). SBA adopted the commenter's suggestion
to include language which makes clear that nondepository lenders who
are also PLP lenders may sell the entire unguaranteed portion, not just
90 percent, of SBA guaranteed loans with SBA's consent.
Section 120.420(b)(2) concerning retention of economic risk, has
been revised to require a nondepository lender which has sold the
unguaranteed portion of a loan, to establish a sufficient reserve fund
at the time of sale. The two other options available in the current
regulations have not been used and are not being retained, and SBA has
only approved proposals that have included a reserve fund.
One commenter proposed that Sec. 120.441, concerning the Certified
Lenders Program, be amended to permit certification of individual loan
officers rather than the lending institution. SBA has considered this
idea previously. SBA relies on the capability of its lenders, not
individual loan officers. Therefore, SBA has decided not to alter the
present procedure at this time. The current selection criteria already
permit consideration of the experience of individual loan officers in
certifying lenders.
Concerning the provision at Sec. 120.442 which sets forth grounds
for suspension or revocation of eligibility to participate in the CLP
program, one commenter suggested including ethics violations as a basis
for suspension or revocation. SBA will consider including this in its
SOP which, if violated, would fall within the language ``violations of
applicable * * * published SBA policies and procedures.'' SBA will
follow suit with the PLP program, which has a similar revocation and
suspension provision. SBA also emphasizes that the reasons listed in
Sec. 120.442 are simply examples of causes for suspension or revocation
and not an exclusive list.
One commenter requested that PLP lenders be allowed to process
loans which refinance interim loans under Sec. 120.452(a)(2). SBA has
decided to permit such loans if made for other than construction
purposes and if the interim loan was approved by the lender within 90
days of receipt of the PLP loan number or the refinancing.
SBA received two comments requesting clarification on whether a
lender was required to be a CLP lender before being eligible to apply
for PLP status. Both commenters approved of the eligibility
requirement. In the final rule, SBA is eliminating this requirement. It
is not necessary to develop lenders into PLP lenders in stages. If a
lender does not perform well as a PLP lender, SBA can revoke its PLP
status.
Several commenters suggested that SBLCs be allowed to extend credit
through other programs. SBA has been considering this for some time and
has decided to amend Sec. 120.470 by allowing SBLCs to provide SBA
guaranteed loans to Intermediaries participating in the SBA Microloan
program.
A commenter suggested raising the minimum bond coverage a Small
Business Lending Company is required to have, from $25,000 to $500,000.
SBA agrees with the commenter that $25,000 is too low and is adopting
the suggestion by amending Sec. 120.470(b)(10).
Subpart E
SBA received several comments concerning Sec. 120.524(a) which sets
forth grounds under which SBA may deny liability. The commenters
opposed the proposed language which would allow SBA to deny liability
upon any failure of a lender to take certain actions, as compared to
the current language of the regulation which allows SBA to deny
liability only upon substantial failure. SBA has decided not to adopt
this suggestion. The final regulation makes it clear that SBA may deny
liability on the basis of any material noncompliance with SBA's
regulations or the terms of applicable loan documentation.
The provisions of Sec. 120.532 et seq., which describe the loan
moratorium program, have been deleted from this final rule and will be
inserted into the Agency's SOPs. The requirements of this program are
already provided for by statute and the regulations are therefore
redundant. SBA has retained in the regulations a short description of
the program, and provides notice that complete information concerning
moratoriums is available at local SBA district offices.
One commenter opined that Sec. 120.540(a) requires additional
language concerning when SBA or a lender may liquidate collateral
securing a loan. SBA agrees and is including language that allows
liquidation if the loan is in default.
One commenter suggested that Sec. 120.540(c)(1) be revised to allow
lenders to liquidate collateral as they normally would, rather than
having to attempt to sell at auction. SBA has adopted the commenter's
suggestion and the section now allows a lender to use negotiated sales
if consistent with its usual practice for liquidating non-SBA-related
assets.
One commenter discussed the revisions to the homestead protection
provisions found at Sec. 120.550 et seq. Much of the details have been
removed with the intention of publishing them in an SOP. The writer was
concerned that persons interested in these provisions will not know
what is needed to comply with the requirements of this program. With
the publication of the procedures in an SOP, persons wishing to know
more about this program will be able to obtain the information easily
from any local SBA district office.
Subpart F
Only one comment was received on Subpart F. The commenter requested
that a definition of ``Associates of a Pool Assembler'' be added to the
definitional section. This comment was not adopted since ``Associate''
is defined in Sec. 120.10 and there is no need for a different
definition for this Subpart. Minor changes were made to this Subpart
for clarification.
Subpart G
Only one comment was received on Subpart G. The commenter suggested
that proposed Sec. 120.707(d) be revised to require Intermediaries to
assign all guarantees and liens from their Microloans to SBA. This
comment was not adopted. SBA believes that it is adequately protected
by the current requirement that the Intermediary pledge to SBA a first
lien position in the Microloan Revolving Fund, Loan Loss Reserve Fund,
and all notes receivable. Minor changes were made to this Subpart for
clarification.
Subpart H
Sec. 120.801. SBA received several comments regarding this
introductory section describing the 504 program in general terms. All
pointed out that a small business must apply for 504 financing through
a CDC servicing the area in which the Project is located, not in which
the business is located. SBA concurs and makes the correction in this
final rule. SBA also has made several other minor revisions to this
section in response to comments.
[[Page 3230]]
Sec. 120.810. Several comments suggested minor changes in one or
more definitions that apply to the 504 program. SBA disagrees with all
of the comments, except one regarding Substantial Increase in
Unemployment. The commenter questioned the need for such a definition,
questioning the SBA's ability to quantify the increases mentioned in
the definition. SBA concurs and has deleted the definition (see
Sec. 120.881).
Sec. 120.827. As a result of a comment, SBA amended this section to
make it clear that a CDC may itself provide financial and technical
assistance to small businesses, as well as help small businesses to
obtain such assistance from other sources.
Sec. 120.828. SBA received 13 comments on this section. As
discussed more thoroughly in the following discussion of expansion into
additional Areas of Operation, small businesses in some areas of the
country receive excellent 504 assistance measured, at least, by loan
activity, while in other areas, few, if any, small businesses have
received assistance. SBA attempted to address this fact by, among other
things, designating a minimum number of loan approvals which a CDC must
process in order to retain certification. The present rule requires a
minimum of 2 loan approvals averaged over the preceding 2 years. In the
proposed rule, SBA altered the requirement to be ``the minimum number
of 504 loans set by SBA in an annual program announcement.'' The
purpose of the proposed change was to give SBA the flexibility to
adjust the number as required to reflect an expected increase in loan
volumes.
Without exception, every comment opposed this change, believing it
imposed a burden both on the industry and SBA to adjust the standard
every year in a program announcement. The industry trade association
recommended changing the annual language to ``from time to time.'' Most
of the other comments suggested that SBA retain its existing
regulation. Based upon such comments, SBA has decided to retain the
standard of 2 per year. The only change from the existing regulation is
that SBA feels it is no longer necessary to use an average of the
previous two years.
Many of the comments confused this issue with the performance
standard for expansion into another Area of Operation. SBA wishes to
emphasize that the standard in Sec. 120.828 has nothing to do with
expansion or competition.
Sec. 120.829. Three comments were received regarding this section.
Title V of the Small Business Investment Act requires a CDC's portfolio
to reflect a Job Opportunity Average. At the present time, the
requirement is one Job Opportunity per $35,000 of 504 funding. That
figure has been in effect for many years. The current regulation
permits the AA/FA to allow a CDC's average to be up to 25 percent
higher in certain areas. In the proposed rule, SBA rounded the 25
percent maximum ($43,875) up to $45,000. Otherwise SBA retained the
current rule.
SBA received comments suggesting that SBA increase both the base
$35,000 and the exception because of inflation. In addition, one
comment recommended that SBA delete all of the exceptions in
Sec. 120.829 except Alaska and Hawaii because the rule is impossible to
administer. SBA rejects both suggestions, principally because it is not
aware that the industry has been having any problem complying with the
Job Opportunity Average requirement at its present level. However, SBA
does agree that redevelopment areas as defined in 42 U.S.C. 3161 should
be deleted from the provision. The purpose of the 25 percent
differential was to assist distressed geographical areas needing
development. However, once designated, redevelopment areas remain so
designated forever. Because they have become so common, the effect
would be to increase the Job Opportunity Average for entire Areas of
Operations to $45,000 rather than $35,000, if the CDC and SBA followed
the regulation exactly. From a review of the Job Opportunity Averages
submitted by CDCs in their annual reports, it is clear that the
increased average in redevelopment areas is not required by CDCs or is
not being followed. Furthermore, areas that were once distressed, but
no longer are, would continue to be eligible for the higher average,
even though it is no longer needed. For these reasons, SBA has
determined that redevelopment areas be deleted from the section.
Sec. 120.830. Several comments objected that the definition of
``Associates'' would cause increased and burdensome reporting
requirements. SBA believes that the amended definition of Associate
cures this problem.
Sec. 120.831. The proposed rule included a new requirement that a
CDC disclose to SBA and the Borrower any referral fees or other payment
made or received by the CDC from the Lender or other party to the 504
transaction. A comment from the industry trade association indicated
that it understood that SBA may want this disclosure, but that it
should be required of all SBA guaranteed lenders, not just CDCs. In the
interest of program consistency, SBA agrees, has broadened the language
to include all lenders, and has consolidated the section with
Sec. 120.195 so that it applies to all business loans.
Sec. 120.835. Throughout the history of the 504 program there has
been a great divergence among CDCs in the number of loan approvals each
year. While some CDCs have exhibited continued growth measured by their
loan approvals and ability to package, process and service loans, other
CDCs have lagged behind. There are many complicated reasons for this,
but the net result has been a patchwork of 504 service (measured by
loan approvals) across the country, with many small businesses in some
areas receiving 504 assistance while in other areas few, if any, small
businesses have received such assistance.
SBA attempted to address this issue by permitting CDCs to expand
temporarily into adjacent areas, and, then, in 1993, by designating a
minimum number of loan approvals per year which a CDC must average over
the previous two fiscal year periods to retain certification as a CDC.
The current number of required loan approvals is two. SBA also
established the status of an Associate Development Company (``ADC'').
Those CDCs unable or unwilling to meet the minimum number of loan
approvals may become ADCs, thereby continuing to participate in the
program goals of economic and community development without having to
make loans. A number of CDCs have been decertified as a result of this
policy and have opted for ADC status.
However, a focus on removal from CDC status does not address the
real question of adequacy of service within an Area of Operations. What
constitutes adequate service within a community? The statutory
objectives of the 504 program are to provide a portion of long term
fixed-asset financing for small business projects that provide jobs and
result in economic development. Clearly, these goals cannot be met in
an Area of Operations unless loans are being packaged, processed,
approved, closed and serviced by one or more CDCs. Unfortunately, SBA
is aware of too many locations across the country in which present CDCs
are unable or unwilling to meet the small business demand for 504
loans. Transferring an existing CDC to ADC status does not address this
inadequacy. SBA has concluded that the answer lies not in
decertification, but in competition and customer service.
Therefore, SBA proposed in Sec. 120.835 that existing CDCs be
permitted to expand into Areas of Operations that are not being
adequately serviced. Under
[[Page 3231]]
the proposed rule, the expanding CDC would have to show that the
proposed Area of Operations is not being adequately served by the
existing CDCs and that the expanding CDC is well-qualified to serve it.
SBA did not propose any geographic or size limitation on CDCs applying
to service a location, but suggested that such factors would be
considered in evaluating the application. As proposed, a CDC would
apply in writing to the SBA district office serving the geographic area
in which the CDC proposes to expand.
In the proposed rule, SBA solicited comment on the factors to be
considered in determining whether an area is being adequately serviced.
As a result of many discussions with industry members, SBA had
concluded that, in general, the starting point for any determination
would be the number of loan approvals averaged by the existing CDCs in
the Area of Operations over the last two fiscal years. Even if the
number of loan approvals does not accurately represent the competence
of a CDC, it does accurately reflect the market penetration of 504
financing in the proposed area of expansion.
SBA had also concluded that there is no minimum loan approval
number appropriate to every CDC in every location across the country. A
small CDC with a rural Area of Operations and slow economic activity
may be providing adequate service at a low level of approvals while a
larger CDC in a metropolitan region with much economic activity may be
providing inadequate service, despite having a greater number of loan
approvals. In the proposed rule, SBA advanced the population of an Area
of Operations as the base factor, but indicated that industry members
had suggested other possibilities such as the number of small
businesses in the Area of Operations.
As a result of numerous consultations with the industry and small
businesses, SBA had also concluded at the time of the proposed rule
that adequate service includes other factors in addition to the number
of loan approvals, including adequate servicing of loans. Thus, in the
proposed rule, SBA indicated that any CDC seeking to expand will have
to show that it has a history of adequate experience and expertise in
both loan packaging and servicing, and that the existing CDCs in the
proposed area of expansion have not been adequately packaging or
servicing loans.
In the proposed rule, SBA solicited comments and recommendations
regarding the factors that should be included in a determination of
whether the existing CDCs are adequately servicing an Area of
Operations. SBA asked commenters to particularly focus on how to
incorporate a servicing component into its approach.
SBA received 35 comments in response to its solicitation. Only two
opposed the policy proposed by SBA. The remainder supported SBA's
efforts to assure availability of 504 financing everywhere in the
country by establishing limited competition. Most of the comments
discussed various factors which the commenter believed should be
incorporated into SBA's decision making process upon receipt of an
application for extension of one CDC into another's Area of Operations.
Among the comments received was a proposal submitted by the industry's
trade association, as well as many recommendations from individual CDCs
and financial institutions.
As a result of the comments received, SBA has determined to amend
its proposed rule in several respects. The proposed rule provided that
SBA would consider an Area of Operations inadequately served if the
existing CDCs in the Area of Operation have not averaged, over the last
two fiscal years, sufficient loan approvals for the population in the
CDCs' Area of Operation, as set by SBA in an annual program
announcement. All of the comments which were addressed to the issue
were concerned about the annual development of a standard. Commenters
expressed the opinion that annually revisiting the standard would
create a ``moving target'' for the industry to achieve and introduce
uncertainty and instability into the industry. Most indicated support
for a reviewable standard consistent with national performance levels.
Most comments were opposed to judging performance solely on the
number of loan approvals based upon population levels as suggested by
SBA in the proposed rule (along with a servicing component). The
comment submitted by the industry's trade association did utilize the
number of loan approvals per million of general population (and a
servicing component) as the criterion for determining that the CDCs in
an Area of Operations are adequately serving the area. However, many
individual CDCs presented numerous other elements which they
recommended be considered as part of the performance level ``formula''.
In addition to the number of loan approvals per population of the Area
of Operation, the various factors included: The number of small
businesses in the Area of Operations; the number of deals closed,
rather than approved (showing that the deals are ``real'' and the CDC
is capable of following through); the density of small businesses in
the Area of Operation; the character of the Area of Operations (urban,
suburban, or rural); the types of small businesses; the economic
conditions prevailing in the Area of Operations; amount loaned per
small business population; jobs created/retained; servicing record and
capabilities; currency rate; loss rates; other services provided to
small businesses (technical and financial assistance); relationship
with the local SBA office; ties to the local community and its
resources; and knowledge of the area and its economic and business
climate. In short, solely looking at loan approval volume is an
inadequate measure of a CDC's service to the community.
Several commenters pointed out potential problems that could result
from basing CDC performance solely on ``packaging'' and loan approval
volume.
SBA agrees with several commenters that level of activity is
probably an accurate barometer of past and future performance. However,
SBA has determined that loan approval volume based upon general
population alone should not be the sole determination of whether an
area is being adequately served.
Based upon the comments received, SBA has decided to amend its
proposed rule to delete the reference to any one factor determining
that an Area of Operations is being inadequately served. Rather, SBA
has determined that loan approval volume should be utilized only as a
benchmark upon which to support the application of a CDC to expand into
an Area of Operation which it presently does not serve. If the loan
approval volume of the existing CDCs in the area does not reach the
benchmark figure, the applying CDC will be able to proceed with its
application.
The application to expand must be in writing to the SBA District
Office serving the geographic area in which the CDC proposes to expand.
It must demonstrate to the satisfaction of SBA that the CDC is capable
of providing the additional territory the full range of services
expected of a CDC, including the ability to process, close, service,
and, if authorized, liquidate 504 loans. The existing CDC or CDCs in
the expansion area will then have at least 30 days in which to respond
to the District Office. The ``burden of proof'' shall be upon the
existing CDC or CDCs to explain why the SBA should not grant the
application for extension. In its deliberations, the SBA District
Office may, in its discretion, consider any factor presented to it, but
SBA will
[[Page 3232]]
consider particularly relevant information concerning the various
factors suggested in the comments to the proposed rule and previously
set forth in this preamble. The SBA District Office shall submit its
recommendation within 30 days of the end of the comment period to the
AA/FA for a final decision within 30 days of receipt of the District
Office's recommendation.
Seven comments cautioned that expansion should be permitted only
into contiguous areas, referencing the problems experienced by the
banking industry when interstate banking was first permitted. These
commenters suggested that ``leapfrogging'' financial institutions may
not know their new markets, leading to potential loan losses and damage
to the program. Two other commenters were concerned with ``cherry
picking'' of valuable markets to the detriment of markets where
business potential was less.
These are both matters which SBA will consider very carefully. The
expanding CDC's application must specify the exact territory into which
it proposes to expand. SBA will compare the loan approval volume of the
existing CDC or CDCs in that exact territory to the benchmark figure.
The expanding CDC will not be able to use an existing CDC's loan
approval volume for its entire Area of Operations (presumably lower) to
justify expansion into a smaller, valuable market, which is being
adequately served by the existing CDC or CDCs. If the more valuable
market is not being adequately served, then the expanding CDC is
justified in attempting to expand into it. SBA will at all times
maintain its focus on the ultimate customers, the small businesses
which both SBA and the CDC industry serve. If small businesses in a
``prime'' area are not being adequately served, the existing CDC or
CDCs will not be supported by SBA in any argument that the area is
being ``cherry picked''. If a CDC is concerned about potential
expansion into its territory, SBA believes, as do many of the
commenters, that competition will cause that CDC to better serve its
community.
Although sensitive to the advantages resulting from regional
experience and knowledge, SBA has determined not to limit applications
for expansion to contiguous areas. SBA will, however, require that an
expanding CDC have a local presence in a non-contiguous territory. As
part of its application, the expanding CDC must indicate how it intends
to provide that local presence, and must agree to have a local presence
in place before submitting any 504 loans for approval.
Finally, the comments presented to SBA several suggestions which it
has considered for establishing the benchmark figure. SBA recognizes
that each number suggested by any of the commenters was somewhat
arbitrary. Several comments presented data on loan approval volume in
the country or in specific regions. Based on the figures provided by
the industry trade association in its comment, total loan approvals for
FY 1993 were 2,388 resulting in an average loans per million of general
population of 5.37. In FY 1994 and 1995, the corresponding figures were
3,685 (8.29 loans per million) and 4,398 (9.89 per million). The
industry trade association suggested that an average of 5 loans per
million of general population, for the previous two years, or 2,
whichever is greater, be the standard. (In the proposed rule, the
standard would have been absolute and determined that a CDC was not
adequately serving its Area of Operation.)
SBA prefers to set a higher target. Unlike the performance standard
in Sec. 120.828, failure to attain the standard will not disqualify a
CDC in any way or cause it to be subject to decertification. So long as
a CDC provides 2 loan approvals per year, it will continue as an active
CDC if it so chooses. The standard in Sec. 120.835 is merely a
benchmark to determine whether another CDC may be able to expand into
the CDC's Area of Operations in order to compete with the CDC in order
to better serve the small business community.
Therefore, SBA has adopted the suggestions contained in the comment
of an individual CDC and has established in this final rule the
benchmark standard of one approved loan per 100,000 of general
population averaged over the last year 2 years. Both the industry and
SBA expect the number of loans approved to grow sharply over the next
several years. As discussed earlier in this preamble, the industry
prefers and SBA agrees that the benchmark remain constant and not
change on an annual basis so that CDCs will know that they have a
constant ``target'' to attain. SBA does not want to establish a
benchmark which is already outdated. The industry average is nearly 10
loan approvals per million (or one per 100,000). By adopting the
comment of 1 per 100,000, SBA feels it has established a figure which
may remain in effect for the foreseeable future and is already exceeded
by a majority of the industry. Further, the benchmark applies to a
total loan volume of all CDCs existing in an Area of Operations, not
each individual CDC.
SBA will continue to work with the industry to refine the
benchmark. One or more of the factors discussed previously may
supplement or ultimately replace loan approvals per 100,000 of general
population (such as small business population, job creation/retention,
loans closed, or dollar amount of loan volume).
Sec. 120.838. In the proposed rule, SBA determined that all
existing, temporary expansions of Areas of Operations would expire
automatically 6 months after the effective date of these regulations,
unless a CDC applies for permanent expansion into that Area before the
expiration date. SBA believed that CDCs will best serve the small
business community by making a permanent commitment to an Area of
Operations. SBA received several comments in support of this provision
and none in opposition. Therefore, SBA adopts the proposed provision
without change in this final rule.
Sec. 120.839. In the proposed rule, SBA provided for a CDC, upon
showing good cause, to apply to SBA to make an individual loan for a
Project outside its Area of Operations in an area not being adequately
served by other CDCs. The SBA also proposed to permit an applicant
small business to write to the AA/FA to request the assistance of a CDC
not currently serving the area. SBA added this provision to give a
small business more flexibility if it had a concern about the ability
of a particular CDC to provide service.
SBA received 12 comments concerning this proposal, none of which
opposed the provision. Several supported the provision as proposed.
Others concurred that case-by-case extensions can help to assure access
to 504 financing, but should be limited to specific situations. Others
felt that the proposed regulations were too vague and permitted too
much discretion on the part of decision-makers. Most commenters favored
more explicit directions and alternatives.
SBA has determined to adopt, in most part, the suggestions of the
industry trade association in its comment. Provided that the applicant
CDC can demonstrate that it can adequately service the loan, a CDC may
apply to make an individual loan outside its Area of Operations if (1)
the applicant CDC has previously assisted the business to obtain a 504
loan, (2) the applicant small business or CDC can document in writing
to the AA/FA specific circumstances that would prevent the existing CDC
or CDCs serving the area from assisting the business adequately, or (3)
the existing CDC or CDCs serving the area agree to
[[Page 3233]]
permit the applicant CDC to make the loan. SBA has deleted from its
proposed rule the reference to an area not adequately served by other
CDCs. As discussed previously with respect to Sec. 120.835, this final
rule does not establish a standard of performance, but only a
benchmark. Thus, it would not be possible to establish that an area is
inadequately served without going through the entire process set forth
in Sec. 120.835, which is not SBA's intent in this section. Further,
the focus in this section is on the particular Project in question and
that is covered sufficiently by the situation (2) as recommended by the
industry trade association. The second circumstance in SBA's proposed
rule, Borrower initiation of the request, is also subsumed into
situation (2) in this final rule.
Sec. 120.840. SBA received one comment regarding this section,
pointing out that the section set forth only basic eligibility
standards for a CDC to become an Accredited Lender, which standards did
not refer to servicing or portfolio quality in any way. SBA concurs
with the comment and has amended the section to include additional
eligibility requirements, including that an applicant must have been a
CDC for a minimum of 12 months.
Sec. 120.845. SBA received two comments regarding this section. One
comment pointed out that the proposed language appeared to suggest that
SBA approved Premier Certified Lender loans in the same manner as any
other 504 loan. SBA has adopted the language of the comment, clarifying
that SBA's final approval is limited to eligibility of the guarantee.
The other comment requested SBA to include in the regulation the
specific amounts and payment schedule of contributions to the loss
reserve. SBA has concluded that this is not necessary. The schedule is
in the statute and will be expounded upon in SBA's SOP, to which PCLPs
will have access. Therefore, SBA declines to adopt this comment.
Sec. 120.862. This section sets forth community development and
public policy goals, the achievement of any one of which causes a
Project to be eligible for 504 financing if a CDC's overall portfolio
of 504 loans, including the subject loan, meets or exceeds the CDC's
Job Opportunity average. Also, qualifying under a public policy goal
makes a Project subject to an increased amount of funding. One comment
pointed out that assisting businesses in Labor Surplus Areas had been a
community development goal in the current regulation, but had been
included as a public policy goal. Another comment pointed out that
there must be a written revitalization plan in order to invoke
revitalizing a business district as a public policy goal. A third
comment pointed out that the rule should include assisting businesses
located in areas affected by Federal budget reduction, not just
businesses affected by such matters. SBA concurs in all three comments
and has made the revisions in this final rule. A fourth comment
contended that assisting manufacturing firms was a public policy goal,
not a community development goal. However, assisting manufacturing
firms has always been a community development goal in SBA's
regulations, and SBA declines to change this long-standing placement.
Sec. 120.871. Both the 7(a) and 504 loan programs limit the amount
of the rentable property which can be leased to a third-party, whether
the loan or Project involves new construction or an existing building.
Currently, there are minor differences between the programs in the
amount of space permitted to be leased. The 504 limitation is currently
set forth in a regulation, while the 7(a) limitations are set forth in
an SOP. Several commenters noted the differences between the programs
and suggested that the proposed regulation be made applicable to all
SBA business loan programs. SBA concurs with the comments and has moved
Secs. 120.871 and 120.872 from Part H to Part A as Secs. 120.131 and
120.132.
Sec. 120.880. SBA received five comments pointing out that the size
standard for 504 eligibility set forth in the proposed rule omitted the
word ``tangible'' to modify net worth. SBA concurs and adds the word
``tangible'' in this final rule.
Sec. 120.881. This section sets forth types of Projects ineligible
only for 504 loans (as opposed to 7(a) loans). In the current
regulation, a Project is ineligible, if the relocation of any of the
operations of the small business will cause a substantial increase in
unemployment in any area of the country or a net reduction of one-third
or more in the workforce of the relocating small business. In the
proposed rule, SBA attempted to limit the effect to distressed areas
rather than the entire country by creating a defined term. As discussed
earlier, commenters pointed out that SBA's proposed definition may have
been unworkable. Therefore, SBA has dropped the proposed change and
returned the relocation limitation to the language in the current
regulation.
One commenter pointed out that speculative projects are ineligible
in all business loan programs, not just 504. SBA concurs and has moved
Sec. 120.881(c) to Sec. 120.110(s).
Sec. 120.882. In the current regulations, costs incurred by a
Borrower in anticipation of receiving a 504 loan are not eligible to be
included in Project costs unless the applicant has filed a written
notices with the CDC and SBA within 60 days of incurring the expense
and SBA gives written approval. As a result, CDCs and SBA receive
notices from many potential borrowers considering 504 financing who
desire to maximize potential financing. Many of these businesses never
actually apply or their applications are denied. In those cases, the
written notices are a useless paperwork burden on SBA, the CDC and the
applicant. Therefore, SBA proposed in Sec. 120.882(a)(2) to eliminate
the requirement for written notice and allow as an eligible Project
cost any expense incurred toward a Project within six months of receipt
by SBA of a complete loan application.
SBA received 16 comments opposing the 6 month limit. Commenters
pointed out that in actual practice the time it takes to reach the
point of application is often far greater than 6 months. In many
metropolitan areas, the zoning use permits, building permits, and other
clearances can take 9 to 12 months. Often engineering plans and
architectural drawings may need to be completed or redone, and lengthy
environmental studies may be required. In states like Minnesota with
long winters, the delay between site preparations and construction may
span more than 6 months.
The intent of the proposed rule was to alleviate unnecessary
paperwork. It was not intended to limit eligible costs. Therefore, SBA
increases the limit in this final rule to 9 months and adopts a comment
suggesting a waiver of the limit by the SBA District Office for good
cause, which waiver should not be unreasonably withheld.
Sec. 120.883. This section sets forth eligible administrative costs
which may be paid with the proceeds of the 504 loan, thereby allowing
the small business to borrow the cost of the item so that it does not
have to be paid out of the Borrower's own resources. One of the
permitted costs is the CDC processing fee. Seven commenters pointed out
that in streamlining the language of the regulation, SBA had deleted
language in the current regulation describing at what point in time the
fee is considered earned and may be collected. SBA agrees that this is
important information for Borrowers to know and adds the requested
language in this final rule.
[[Page 3234]]
Another grouping of costs traditionally allowed by SBA to be paid
out of the proceeds of the 504 loan are closing costs. Currently, SBA
interprets closing costs to include fees of professionals, such as
engineers and attorneys, involved in the Project (see Sec. 120.961(a)).
Typically, many of the legal services required to close the 504
financing are provided by the CDC's counsel, who is usually experienced
in closing 504 loans and thus, is able to do so cost effectively.
Sometimes, a Borrower will also retain an attorney. Under the current
regulations, the CDC may charge the Borrower up to $2,500 to reimburse
the CDC for the legal expenses resulting from services performed by the
CDC counsel relating to the 504 financing. The Borrower must pay the
legal fees of Borrower's counsel, if retained. If CDC counsel desires
to charge the CDC more than $2,500, the CDC may only do so if SBA
approves the higher fee, in which case, the CDC must pay the difference
to the CDC counsel and may not be reimbursed by the Borrower. The CDC
collects the fee (up to $2,500) at closing and forwards it to the
closing attorney.
The $2,500 figure in the current regulation has engendered much
debate within the industry. Many CDCs feel the figure establishes a
minimum base for attorney fees and is, therefore, anti-competitive. On
the other hand, during the past year, SBA has conducted several
expedited closing training sessions for CDC counsel. Many attorneys
feel that the figure establishes a ceiling for attorney services and
is, therefore, anti-competitive. There appears to be a wide range of
fees charged by CDC counsel for closing services.
Most CDCs try to minimize counsel fees to reduce costs to the
Borrower. One of the ways is for the CDC to use in-house counsel.
Another way is to use in-house paralegals and staff to prepare the
closing documents, close the loan, and present a completed loan closing
package after closing to outside counsel solely for review and legal
opinion. However, the current regulations allow a CDC to charge the
Borrower only for the legal bill of outside CDC counsel. A CDC that
retains its own counsel in-house or employs paralegals and other staff
to prepare and close the loan cannot recover its costs for providing
that service.
In the proposed regulation, SBA omitted reference to any legal fee
amount in either Sec. 120.883(d) or Sec. 120.961(a). Whether it is
viewed as a ceiling or a base, the $2,500 reference certainly appears
to have had an effect on legal fees charged. SBA believes legal fees
should be determined by the competitive market. There is no reason for
SBA to influence the market rate by referring to a specific fee level
in its regulation.
SBA received 15 comments concerning legal fees from the industry.
All but one strongly objected to the deletion of the $2,500 reference
from the regulations. In addition, several comments requested SBA to
allow CDCs to recover the staff and in-house counsel costs of closing a
loan.
SBA concurs with the comments recommending that CDCs be allowed to
charge the Borrower for the in-house costs of preparing the loan
documents and closing the loan. Since both the CDCs and SBA desire to
reduce the level of legal fees incurred by the Borrowers, it is self-
defeating to require CDCs to utilize outside counsel in order to
recover legal costs. Allowing the CDC to recover in-house costs from
the Borrower will still result in a savings to the Borrower because the
costs of CDC staff and in-house counsel are less than outside counsel.
Therefore, proposed rule Sec. 120.961(a) (which is Sec. 120.971(a)(2))
in this final rule has been amended to allow the CDC to charge the
Borrower an amount sufficient to reimburse it for reasonable legal
expenses of outside counsel, and in-house counsel and staff related to
closing the 504 financing.
Despite the near unanimous opposition to the deletion of the $2,500
reference, SBA declines to amend either Sec. 120.883(d) or
Sec. 120.971(a)(2) (Sec. 120.961(a) in the proposed rule). None of the
comments presented any persuasive arguments to cause SBA to change its
convictions. Many of the comments referred to the $2,500 reference as a
``cap'' which kept legal fees to the Borrower in line. Whether it
functioned more to inhibit or increase fees is open for discussion. But
exceeding the ``cap'' certainly did not affect the Borrower. If SBA
approved, the CDC paid the attorney without reimbursement. Thus, if the
reference functioned as a ``cap'', it did so to benefit the CDC, not
the Borrower.
As more attorneys become designated to perform expedited 504 loan
closings, as more attorneys become familiar with the 504 closing
process (because of the expected large increase in loan volume), and as
additional CDCs use in-house counsel or paralegal staff to prepare
documents and close loans, SBA expects competitive pressures to limit
increases in legal fees. In any event, SBA does not belong in the
business of setting or suggesting legal fees. That is a function of the
competitive market.
The comment process caused SBA to review carefully the whole issue
of legal fees as treated in the 504 program compared to commercial
lending generally. A number of comments present information concerning
CDC efforts to reduce Borrowers' legal costs. SBA has previously
interpreted legal fees to be eligible costs, either as Project costs or
administrative costs. Most of the legal fees for which a Borrower is
responsible are eligible Project costs directly attributable and
essential to the Project.
Legal fees associated with the closing of the 504 loan are not
eligible as Project costs. They are not directly attributable and
essential to the Project. If they are eligible at all, they would have
to be eligible administrative costs.
All of the eligible administrative costs in Sec. 120.883, with the
exception of legal fees, are fees imposed upon the Borrower by the
financing process itself over which the Borrower has no control. All
are defined by regulation or other government entities (recording fees,
for example). The only variable cost is legal fees.
Closing legal fees are not usually financed by commercial loan
proceeds. Closing legal fees are current costs. Why should they be
financed over 20 years? Legal fees are not usually financed over time.
SBA suspects that if claims are true that closing legal fees have been
maintained at an artificially high level, it is because the fees have
been able to be financed over a lengthy period of time and have been
``hidden'' in the Debenture. SBA has concluded that closing legal fees
should not be eligible administrative costs for 504 loans. CDCs and
Borrowers will now have a real incentive to reduce fees. Therefore, in
this final rule, SBA has eliminated legal fees from the eligible
administrative costs for 504 loans in Sec. 120.883(d).
Finally, several commenters recommended that the specific fees for
the items in Sec. 120.883 be identified. SBA concurs. These fees have
been set forth with specific numbers in Sec. 120.971.
Sec. 120.891. This section of the proposed rule required the
interim lender to certify to the amount of the interim loan disbursed
and the CDC to certify that the Project was completed in accordance
with the plans and specifications. Three comments noted that the
wording of the first requirement implied that the interim lender must
certify to much more than just the amount disbursed. SBA concurs that
the language could be misleading. In this final rule, SBA clarifies
that the interim lender must certify only the amount disbursed.
[[Page 3235]]
Sec. 120.892. This sections deals with certifications to SBA by the
CDC, interim lender, and Borrower that there has been no adverse change
in the ability of the Borrower to repay the 504 loan. For over 15 years
the standard phrase used was ``unremedied substantial adverse change.''
In the proposed rule, SBA substituted ``adverse change,'' believing
that if there were insubstantial adverse changes or remedied changes,
it did not affect whether the Borrower could repay the loan. However,
after receiving seven comments requesting a return to the familiar
language, SBA amends the three subsections of Sec. 120.892 to insert in
this final rule ``unremedied substantial adverse change.''
Sec. 120.911. The current regulations state that the Borrower's
contribution to the permanent financing may be land or cash. The
regulations have never permitted the value of buildings or other
structures on the land to be counted toward the Borrower's
contribution. SBA did not propose any change in this section in the
proposed rule.
However, SBA received 10 comments suggesting that SBA consider
including the value of site improvements such as buildings on
contributed property if the Project is for the purpose of renovating
the building or constructing an addition to the building. According to
the comments, older buildings that need renovation are often not
financed under the 504 program due to this restriction. SBA sees no
reason why it should not agree to these suggestions. Whatever the
original purpose of the restriction may have been, it appears to have
no logical reason, credit or otherwise, for continuing it. Therefore,
SBA adopts the comments in this final rule and allows Borrowers to
contribute the value of buildings, structures and other site
improvements which will be part of the Project Property, previously
acquired by the Borrower or CDC.
Sec. 120.921. As a result of comments received, two subsections
have been added to Sec. 120.921. First, Sec. 120.923(b) in the proposed
rule has become Sec. 120.921(d). The language of the proposed rule has
been changed to clarify that a Third-Party lienholder must subordinate
to the CDC/SBA lien any future advance in excess of the outstanding
principal balance and accrued interest of the Third-Party Loan at the
time of such advance. The new Sec. 120.921(e) prohibits a Third-Party
lender from escalating the rate of interest upon default to an amount
greater than the maximum rate in Sec. 120.921(b).
Sec. 120.930. SBA received five comments pointing out that the
language was confusing. In the proposed rule, SBA attempted to indicate
what happens if the cost of the completed Project is less than the
Debenture amount. Since five commenters all felt the language was
confusing, SBA returns in this final rule to the language in the
present regulation.
Sec. 120.938. This section defines when SBA will look to the CDC
for recourse in the event it defaults on a Debenture. SBA received 6
comments contending that negligence is too high a standard. SBA
examined the Debenture which CDCs sign. The language in the Debenture
includes fraud, negligence, or misrepresentation. Therefore, SBA has
adopted the language in the Debenture.
Sec. 120.961(b). SBA received 4 comments contending that the
referral fee which a CDC may charge a Third-Party lender is excessive.
However, none of the comments presented any reasons or support for such
assertions. Therefore, SBA declines to change the proposed rule.
However, commenters did point out an error in the section in that the
fee applies to the Third-Party loan, not the 504 loan. In addition, SBA
refers to the fee in the final rule as a referral fee, rather than a
finder's fee. SBA further indicates in this final rule that a CDC
receiving such a fee must comply with the regulations under Part 103 of
this chapter.
Sec. 120.971. In this final rule, SBA has consolidated into this
section the fees which were previously set forth in Sec. 120.883, so
that a Borrower may find in one section all allowable fees to which it
may be subject.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this final rule involves internal administrative
procedures and does not constitute a significant rule within the
meaning of Executive Order 12866 and does not have a significant
economic impact on a substantial number of small entities within the
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. It is
not likely to have an annual economic effect of $100 million or more,
result in a major increase in costs or prices, or have a significant
adverse effect on competition or the United States economy.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this final rule contains no new reporting or record
keeping requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
has no federalism implications warranting the preparation of a
Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.
List of Subjects
13 CFR Part 108
Equal employment opportunity, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 116
Coastal Zone, Flood insurance, Flood plains, Lead poisoning, Small
businesses, Veterans.
13 CFR Part 120
Loan programs-business, Reporting and recordkeeping requirements,
Small businesses.
13 CFR Part 122
Community development, Employee benefit plans, Energy conservation,
Environmental protection, Exports, Individuals with disabilities, Loan
programs-business, Loan programs-energy, Loan programs-veterans,
Microloans, Reporting and recordkeeping requirements, Small businesses,
Solar energy, Trusts and trustees, Veterans.
13 CFR Part 131
Loan programs-business, Small businesses.
Accordingly, pursuant to the authority set forth in sections
5(b)(1) and (b)(6) of the Small Business Act, 15 U.S.C. 634(b)(6) and
636(a) and (h), SBA hereby amends Chapter I of Title 13, Code of
Federal Regulations (CFR), as follows:
1. Part 120 is revised to read as follows:
PART 120--BUSINESS LOANS
General Descriptions of SBA'S Business Loan Programs
Sec.
120.1 Which loan programs does this part cover?
120.2 Descriptions of the business loan programs.
120.3 Pilot programs.
Definitions
120.10 Definitions.
[[Page 3236]]
Subpart A--Policies Applying to All Business Loans
Eligibility Requirements
120.100 What are the basic eligibility requirements for all
applicants for SBA business loans?
120.101 Credit not available elsewhere.
120.102 Funds not available from alternative sources, including
personal resources of principals.
120.103 Are farm enterprises eligible?
120.104 Are businesses financed by SBICs eligible?
120.105 Special consideration for veterans.
Ineligible Businesses and Eligible Passive Companies
120.110 What businesses are ineligible for SBA business loans?
120.111 What conditions must an Eligible Passive Company satisfy?
Uses of Proceeds
120.120 What are eligible uses of proceeds?
120.130 Restrictions on uses of proceeds.
120.131 Leasing part of new construction or existing building to
another business.
Ethical Requirements
120.140 What ethical requirements apply to participants?
Credit Criteria for SBA Loans
120.150 What are SBA's lending criteria?
120.151 What is the statutory limit for total loans to a Borrower?
120.160 Loan conditions.
Requirements Imposed Under Other Laws and Orders
120.170 Flood insurance.
120.171 Compliance with child support obligations.
120.172 Flood-plain and wetlands management.
120.173 Lead-based paint.
120.174 Earthquake hazards.
120.175 Coastal barrier islands.
120.176 Compliance with other laws.
Enforceability Despite Rule Changes
120.180 Are rules enforceable if they are changed later?
Loan Applications
120.190 Where does an applicant apply for a loan?
120.191 The contents of a business loan application.
120.192 Approval or denial.
120.193 Reconsideration after denial.
Computerized SBA Forms
120.194 Use of computer forms.
Reporting of Fees
120.195 Disclosure of Fees.
Subpart B--Policies Specific to 7(a) Loans
Bonding Requirements
120.200 What bonding requirements exist during construction?
Limitations on Use of Proceeds
120.201 Refinancing unsecured or undersecured loans.
120.202 Restrictions on loans for changes in ownership.
Maturities; Interest Rates; Loan and Guarantee Amounts
120.210 What percentage of a loan may SBA guarantee?
120.211 What limits are there on the amounts of direct loans?
120.212 What limits are there on loan maturities?
120.213 What fixed interest rates may a Lender charge?
120.214 What conditions apply for variable interest rates?
120.215 What interest rates apply to smaller loans?
Fees for Guaranteed Loans
120.220 Fees that Lender pays SBA.
120.221 Fees which the Lender may collect from a loan applicant.
120.222 Fees which the Lender or Associate may not collect from the
Borrower or share with third parties.
Subpart C--Special Purpose Loans
120.300 Statutory authority.
Disabled Assistance Loan Program (DAL)
120.310 What assistance is available for the disabled?
120.311 Definitions.
120.312 DAL-1 use of proceeds and other program conditions.
120.313 DAL-2 use of proceeds and other program conditions.
120.314 Resolving doubts about creditworthiness.
120.315 Interest rate and loan limit.
Businesses Owned by Low Income Individuals
120.320 Policy.
Energy Conservation
120.330 Who is eligible for an energy conservation loan?
120.331 What devices or techniques are eligible for a loan?
120.332 What are the eligible uses of proceeds?
120.333 Are there any special credit criteria?
Export Working Capital Program (EWCP)
120.340 What is the Export Working Capital Program?
120.341 Who is eligible?
120.342 What are eligible uses of proceeds?
120.343 Collateral.
120.344 Unique requirements of the EWCP.
International Trade Loans
120.345 Policy.
120.346 Eligibility.
120.347 Use of proceeds.
120.348 Amount of guarantee.
Qualified Employee Trusts (ESOP)
120.350 Policy.
120.351 Definitions.
120.352 Use of proceeds.
120.353 Eligibility.
120.354 Creditworthiness.
Veterans Loan Program
120.360 Which veterans are eligible?
120.361 Other conditions of eligibility.
Pollution Control Program
120.370 Policy.
Loans to Participants in the 8(a) Program
120.375 Policy.
120.376 Special requirements.
120.377 Use of proceeds.
Defense Economic Transition Assistance
120.380 Program.
120.381 Eligibility.
120.382 Repayment ability.
120.383 Restrictions on loan processing.
Caplines Program
120.390 Revolving credit.
Builders Loan Program
120.391 What is the Builders Loan Program?
120.392 Who may apply?
120.393 Are there special application requirements?
120.394 What are the eligible uses of proceeds?
120.395 What is SBA's collateral position?
120.396 What is the term of the loan?
120.397 Are there any special restrictions?
Subpart D--Lenders
120.400 Loan Guarantee Agreements.
Participation Criteria
120.410 Requirements for all participating Lenders.
120.411 Preferences.
120.412 Other services Lenders may provide Borrowers.
120.413 Advertisement of relationship with SBA.
Pledging Notes or Transferring Unguaranteed Portion
120.420 Financings by Nondepository Lenders.
Miscellaneous Provisions
120.430 SBA access to Lender files.
120.431 Suspension or revocation of eligibility to participate.
Certified Lenders Program (CLP)
120.440 What is the Certified Lenders Program?
120.441 How does a Lender become a CLP Lender?
120.442 Suspension or revocation of CLP status.
Preferred Lenders Program (PLP)
120.450 What is the Preferred Lenders Program?
120.451 How does a Lender become a PLP Lender?
120.452 What are the requirements of PLP loan processing?
120.453 What are the requirements of a PLP Lender in servicing and
liquidating SBA guaranteed loans?
120.454 PLP performance review.
120.455 Suspension or revocation of PLP status.
Small Business Lending Companies (SBLC)
120.470 What is an SBLC?
120.471 Records.
120.472 Reports to SBA.
120.473 Change of ownership or control.
120.474 Prohibited financing.
[[Page 3237]]
120.475 Audits.
120.476 Suspension or revocation.
Subpart E--Loan Administration
120.500 General.
Servicing
120.510 Servicing direct and immediate participation loans.
120.511 Servicing guaranteed loans.
120.512 Who services the loan after SBA honors its guarantee?
120.513 What servicing actions require the
FR Doc. 96-1432 Business Loan Programs
prior written consent of
SBA?
SBA'S Purchase of a Guaranteed Portion
120.520 When does SBA honor its guarantee?
120.521 What interest rate applies after SBA purchases its
guaranteed portion?
120.522 How much accrued interest does SBA pay to the Lender or
Registered Holder when SBA purchases the guaranteed portion?
120.523 What is the ``earliest uncured payment default''?
120.524 When is SBA released from liability on its guarantee?
Deferment, Extension of Maturity and Loan Moratorium
120.530 Deferment of payment.
120.531 Extension of maturity.
120.532 What is a loan Moratorium?
Liquidation of Collateral
120.540 What are SBA's policies concerning liquidation of
collateral?
Homestead Protection for Farmers
120.550 What is homestead protection for farmers?
120.551 Who is eligible for homestead protection?
120.552 Lease.
120.553 Appeal.
120.554 Conflict of laws.
Subpart F--Secondary Market
Fiscal and Transfer Agent (FTA)
120.600 Definitions.
120.601 SBA Secondary Market.
Certificates
120.610 Form and terms of Certificates.
120.611 Pools backing Pool Certificates.
120.612 Loans eligible to back Certificates.
120.613 Secondary Participation Guarantee Agreement.
The SBA Guarantee of a Certificate
120.620 SBA guarantee of a Pool Certificate.
120.621 SBA guarantee of an Individual Certificate.
Pool Assemblers
120.630 Qualifications to be a Pool Assembler.
120.631 Suspension or termination of Pool Assembler.
Miscellaneous Provisions
120.640 Administration of the Pool and Individual Certificates.
120.641 Disclosure to purchasers.
120.642 Requirements before the FTA issues Pool Certificates.
120.643 Requirements before the FTA issues Individual Certificate.
120.644 Transfers of Certificates.
120.645 Redemption of Certificates.
120.650 Registration duties of FTA in Secondary Market.
120.651 Claim to FTA by Registered Holder to replace Certificate.
120.652 FTA fees.
Suspension or Revocation of Participant in Secondary Market
120.660 Suspension or revocation.
Subpart G--Microloan Demonstration Program
120.700 What is the Microloan Program?
120.701 Definitions.
120.702 Are there limitations on who can be an Intermediary or on
where an Intermediary may operate?
120.703 How does an organization apply to become an Intermediary?
120.704 How are applications evaluated?
120.705 What is a Specialized Intermediary?
120.706 What are the terms and conditions of an Intermediary SBA
loan?
120.707 What conditions apply to loans by Intermediaries to
Microloan borrowers?
120.708 What is the Intermediary's financial contribution?
120.709 What is the Microloan Revolving Fund?
120.710 What is the Loan Loss Reserve Fund?
120.711 What rules govern Intermediaries?
120.712 How does an Intermediary get a grant to assist Microloan
Borrowers?
120.713 Does SBA provide technical assistance to Intermediaries?
120.714 How does a non-Intermediary get a grant?
120.715 Does SBA guarantee any loans an Intermediary obtains from
another source?
Subpart H--Development Company Loan Program (504)
120.800 What is the purpose of the 504 program?
120.801 How is a 504 Project financed?
120.802 Definitions.
Certification Procedures to Become a CDC
120.810 Applications for certification as a CDC.
120.811 Public notice of CDC certification application.
120.812 Probationary period for newly certified CDCs.
Requirements for CDC Certification and Operation
120.820 CDC non-profit status.
108.821 CDC Area of Operations.
120.822 CDC membership.
120.823 CDC Board of Directors.
120.824 Professional management and staff.
120.825 Financial ability to operate.
120.826 Basic requirements for operating a CDC.
120.827 Services a CDC provides to small businesses.
120.828 Minimum level of CDC lending activity.
120.829 Job Opportunity average a CDC must maintain.
120.830 Reports a CDC must submit.
Extending a CDC's Area of Operations
120.835 Application to extend an Area of Operations.
120.836 Public notice and opportunity for response.
120.837 SBA decision on application for extension.
120.838 Expiration of existing, temporary expansions.
120.839 Case-by-case extensions.
Accredited Lenders Program
120.840 Accredited Lenders Program (ALP).
Premier Certified Lenders Program
120.845 Premier Certified Lenders Program.
Associate Development Companies (ADCs)
120.850 ADC functions.
120.851 ADC eligibility and operating requirements.
120.852 Suspension and revocation of ADCs.
Ethical Requirements
120.855 CDC and ADC ethical requirements.
Project Economic Development Goals
120.860 Required objectives.
120.861 Job creation or retention.
120.862 Other economic development objectives.
Leasing Policies Specific to 504 Loans
120.870 Leasing Project Property.
120.871 Leasing part of an existing building to another business.
Loan-Making Policies Specific to 504 Loans
120.880 Basic eligibility requirements.
120.881 Ineligible Projects for 504 loans.
120.882 Eligible Project costs for 504 loans.
120.883 Eligible administrative costs for 504 loans.
120.884 Ineligible costs for 504 loans.
Interim Financing
120.890 Source of interim financing.
120.891 Certifications of disbursement and completion.
120.892 Certifications of no adverse change.
Permanent Financing
120.900 What are the sources of permanent financing?
The Borrower's Contribution
120.910 How much must the Borrower contribute?
120.911 Land contributions.
120.912 Borrowed contributions.
120.913 May an SBIC provide the contribution?
Third Party Loans
120.920 The first lien position.
120.921 Terms of Third Party loans.
120.922 Pre-existing debt on the Project Property.
120.923 What are the policies on subordination?
120.924 Prepayment of subordinate financing.
120.925 Preferences.
120.926 Referral fees.
504 Loans and Debentures
120.930 Amount.
120.931 504 lending limits.
[[Page 3238]]
120.932 Interest rate.
120.933 Maturity.
120.934 Collateral.
120.935 Deposit.
120.936 Subordination to CDC.
120.937 Assumption.
120.938 Default.
120.939 Borrower prohibition.
120.940 Prepayment of the 504 loan or Debenture.
120.941 Certificates.
Debenture Sales and Service Agents
120.950 SBA and CDC must appoint agents.
120.951 Selling agent.
120.952 Fiscal agent.
120.953 Trustee.
120.954 Central Servicing Agent.
120.955 Agent bonds and records.
120.956 Suspension or revocation of brokers and dealers.
Closings
120.960 Responsibility for closing.
120.961 Construction escrow accounts.
Servicing and Fees
120.970 Servicing of 504 loans and Debentures.
120.971 Allowable fees paid by Borrower.
120.972 Oversight and evaluation of CDCs and ADCs.
CDR Transfer, Suspension and Revocation
120.980 Transfer of CDC to ADC status.
120.981 Voluntary transfer and surrender of CDC certification.
120.982 Correcting CDC servicing deficiencies.
120.983 Transfer of CDC servicing to SBA or another CDC.
120.984 Suspension or revocation of CDC certification.
Enforceability of 501, 502 and 503 Loans and Other Laws
120.990 501, 502 and 503 loans.
120.991 Effect of other laws.
Authority: 15 U.S.C 634(b)(6) and 636(a) and (h).
General Descriptions of SBA's Business Loan Programs
Sec. 120.1 Which loan programs does this part cover?
This Part regulates SBA's financial assistance to small businesses
under its general business loan programs (``7(a) loans'') authorized by
section 7(a) of the Small Business Act (``the Act''), 15 U.S.C. 636(a),
its microloan demonstration loan program (``Microloans'') authorized by
section 7(m) of the Act, 15 U.S.C. 636(m), and its development company
program (``504 loans'') authorized by Title V of the Small Business
Investment Act, 15 U.S.C. 695 to 697f (``Title V''). These three
programs constitute the business loan programs of the SBA.
Sec. 120.2 Descriptions of the business loan programs.
(a) 7(a) loans. (1) 7(a) loans provide financing for general
business purposes and may be:
(i) A direct loan by SBA;
(ii) An immediate participation loan by a Lender and SBA; or
(iii) A guaranteed loan (deferred participation) by which SBA
guarantees a portion of a loan made by a Lender.
(2) A guaranteed loan is initiated by a Lender agreeing to make an
SBA guaranteed loan to a small business and applying to SBA for SBA's
guarantee under a blanket guarantee agreement (participation agreement)
between SBA and the Lender. If SBA agrees to guarantee (authorizes) a
portion of the loan, the Lender funds and services the loan. If the
small business defaults on the loan, SBA's guarantee requires SBA to
purchase its portion of the outstanding balance, upon demand by the
Lender and subject to specific conditions. Regulations specific to 7(a)
loans are found in subpart B of this part.
(b) Microloans. SBA makes loans and loan guarantees to non-profit
Intermediaries that make short-term loans up to $25,000 to eligible
small businesses for general business purposes, except payment of
personal debts. SBA also makes grants to Intermediaries for use in
providing management assistance and counseling to small businesses.
Regulations specific to these loans are found in subpart G of this
part.
(c) 504 loans. Projects involving 504 loans require long-term
fixed-asset financing for small businesses. A Certified Development
Company (CDC) provides the final portion of this financing with a 504
loan made from the proceeds of a Debenture issued by the CDC,
guaranteed 100 percent by SBA (with the full faith and credit of the
United States), and sold to investors. The regulations specific to
these loans are found in subpart H of this part.
Sec. 120.3 Pilot programs.
The Administrator of SBA may from time to time suspend, modify, or
waive rules for a limited period of time to test new programs or ideas.
The Administrator shall publish a document in the Federal Register
explaining the reasons for these actions.
Subpart A--Policies Applying to All Business Loans
Definitions
Sec. 120.10 Definitions.
The following terms have the same meaning wherever they are used in
this part. Defined terms are capitalized wherever they appear.
Associate. (1) An Associate of a Lender or CDC is:
(i) An officer, director, key employee, or holder of 20 percent or
more of the value of the Lender's or CDC's stock or debt instruments,
or an agent involved in the loan process;
(ii) Any entity in which one or more individuals referred to in
paragraphs (1)(i) of this definition or a Close Relative of any such
individual owns or controls at least 20 percent.
(2) An Associate of a small business is:
(i) An officer, director, owner of more than 20 percent of the
equity, or key employee of the small business;
(ii) Any entity in which one or more individuals referred to in
paragraphs (2)(i) of this definition owns or controls at least 20
percent; and
(iii) Any individual or entity in control of or controlled by the
small business (except a Small Business Investment Company (``SBIC'')
licensed by SBA).
(3) For purposes of this definition, the time during which an
Associate relationship exists commences six months before the following
dates and continues as long as the certification, participation
agreement, or loan is outstanding:
(i) For a CDC, the date of certification by SBA;
(ii) For a Lender, the date of application for a loan guarantee on
behalf of an applicant; or
(iii) For a small business, the date of the loan application to
SBA, the CDC, the Intermediary, or the Lender.
Authorization is SBA's written agreement providing the terms and
conditions under which SBA will make or guarantee business loans. It is
not a contract to make a loan.
Borrower is the obligor of an SBA business loan.
Certified Development Company (``CDC'') is an entity authorized by
SBA to deliver 504 financing to small businesses.
Close Relative is a spouse; a parent; or a child or sibling, or the
spouse of any such person.
Eligible Passive Company is a small entity or trust which does not
engage in regular and continuous business activity, which leases real
or personal property to an Operating Company for use in the Operating
Company's business, and which complies with the conditions set forth in
Sec. 120.111.
Intermediary is the entity in the Microloan program that receives
SBA financial assistance and makes loans to small businesses in amounts
up to $25,000.
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Lender is an institution that has executed a participation
agreement with SBA under the guaranteed loan program.
Loan Instruments are the Authorization, note, instruments of
hypothecation, and all other agreements and documents related to a
loan.
Operating Company is an eligible small business actively involved
in conducting business operations now or about to be located on real
property owned by an Eligible Passive Company, or using or about to use
in its business operations personal property owned by an Eligible
Passive Company.
Preference is any arrangement giving a Lender or a CDC a preferred
position compared to SBA relating to the making, servicing, or
liquidation of a business loan with respect to such things as
repayment, collateral, guarantees, control, maintenance of a
compensating balance, purchase of a Certificate of deposit or
acceptance of a separate or companion loan, without SBA's consent.
Rural Area is a political subdivision or unincorporated area in a
non-metropolitan county (as defined by the Department of Agriculture),
or, if in a metropolitan county, any such subdivision or area with a
resident population under 20,000 which is designated by SBA as rural.
Service Provider is an entity that contracts with a Lender or CDC
to perform management, marketing, legal or other services.
Subpart A--Policies Applying to All Business Loans
Eligibility Requirements
Sec. 120.100 What are the basic eligibility requirements for all
applicants for SBA business loans?
To be eligible for an SBA business loan, a small business applicant
must:
(a) Be an operating business (except for loans to Eligible Passive
Companies);
(b) Be organized for profit;
(c) Be located in the United States;
(d) Be small under the size requirements of Part 121 of this
chapter (including affiliates). See subpart H of this part for the size
standards of Part 121 of this chapter which apply only to 504 loans;
and
(e) Be able to demonstrate a need for the desired credit.
Sec. 120.101 Credit not available elsewhere.
SBA provides business loan assistance only to applicants for whom
the desired credit is not otherwise available on reasonable terms from
non-Federal sources. SBA requires the Lender or CDC to certify or
otherwise show that the desired credit is unavailable to the applicant
on reasonable terms and conditions from non-Federal sources without SBA
assistance, taking into consideration the prevailing rates and terms in
the community in or near where the applicant conducts business, for
similar purposes and periods of time. Submission of an application to
SBA by a Lender or CDC constitutes certification by the Lender or CDC
that it has examined the availability of credit to the applicant, has
based its certification upon that examination, and has substantiation
in its file to support the certification.
Sec. 120.102 Funds not available from alternative sources, including
personal resources of principals.
(a) An applicant for a business loan must show that the desired
funds are not available from the personal resources of any owner of 20
percent or more of the equity of the applicant. SBA will require the
use of personal resources from any such owner as an injection to reduce
the SBA funded portion of the total financing package (i.e., any SBA
loans and any other financing, including loans from any other source)
when that owner's liquid assets exceed the amounts specified in
paragraphs (a)(1) through (3) of this section. When the total financing
package:
(1) Is $250,000 or less, each 20 percent owner of the applicant
must inject any personal liquid assets which are in excess of two times
the total financing package or $100,000, whichever is greater;
(2) Is between $250,001 and $500,000, each 20 percent owner of the
applicant must inject any personal liquid assets which are in excess of
one and one-half times the total financing package or $500,000,
whichever is greater;
(3) Exceeds $500,000, each 20 percent owner of the applicant must
inject any personal liquid assets which are in excess of one times the
total financing package or $750,000, whichever is greater.
(b) Any liquid assets in excess of the applicable amount set forth
in paragraph (a) of this section must be used to reduce the SBA portion
of the total financing package. These funds must be injected prior to
the disbursement of the proceeds of any SBA financing.
(c) For purposes of this section, liquid assets means cash or cash
equivalent, including savings accounts, CDs, stocks, bonds, or other
similar assets. Equity in real estate holdings and other fixed assets
are not to be considered liquid assets.
Sec. 120.103 Are farm enterprises eligible?
Federal financial assistance to agricultural enterprises is
generally made by the United States Department of Agriculture (USDA),
but may be made by SBA under the terms of a Memorandum of Understanding
between SBA and USDA. Farm-related businesses which are not
agricultural enterprises are eligible businesses under SBA's business
loan programs.
Sec. 120.104 Are businesses financed by SBICs eligible?
SBA may make or guarantee loans to a business financed by an SBIC
if SBA's collateral position will be superior to that of the SBIC. SBA
may also make or guarantee a loan to an otherwise eligible small
business which temporarily is owned or controlled by an SBIC under the
regulations in part 107 of this chapter. SBA neither guarantees SBIC
loans nor makes loans jointly with SBICs.
Sec. 120.105 Special consideration for veterans.
SBA will give special consideration to a small business owned by a
veteran or, if the veteran chooses not to apply, to a business owned or
controlled by one of the veteran's dependents. If the veteran is
deceased or permanently disabled, SBA will give special consideration
to one survivor or dependent. SBA will process the application of a
business owned or controlled by a veteran or dependent promptly,
resolve close questions in the applicant's favor, and pay particular
attention to maximum loan maturity. For SBA loans, a veteran is a
person honorably discharged from active military service.
Ineligible Businesses and Eligible Passive Companies
Sec. 120.110 What businesses are ineligible for SBA business loans?
The following types of businesses are ineligible:
(a) Non-profit businesses (for-profit subsidiaries are eligible);
(b) Financial businesses primarily engaged in the business of
lending, such as banks, finance companies, and factors (pawn shops,
although engaged in lending, may qualify in some circumstances);
(c) Passive businesses owned by developers and landlords that do
not actively use or occupy the assets acquired or improved with the
loan proceeds (except Eligible Passive Companies under Sec. 120.111);
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(d) Life insurance companies;
(e) Businesses located in a foreign country (businesses in the U.S.
owned by aliens may qualify);
(f) Pyramid sale distribution plans;
(g) Businesses deriving more than one-third of gross annual revenue
from legal gambling activities;
(h) Businesses engaged in any illegal activity;
(i) Private clubs and businesses which limit the number of
memberships for reasons other than capacity;
(j) Government-owned entities (except for businesses owned or
controlled by a Native American tribe);
(k) Businesses principally engaged in teaching, instructing,
counseling or indoctrinating religion or religious beliefs, whether in
a religious or secular setting;
(l) Consumer and marketing cooperatives (producer cooperatives are
eligible);
(m) Loan packagers earning more than one third of their gross
annual revenue from packaging SBA loans;
(n) Businesses with an Associate who is incarcerated, on probation,
on parole, or has been indicted for a felony or a crime of moral
turpitude;
(o) Businesses in which the Lender or CDC, or any of its Associates
owns an equity interest;
(p) Businesses which:
(1) Present live performances of a prurient sexual nature; or
(2) Derive directly or indirectly more than de minimis gross
revenue through the sale of products or services, or the presentation
of any depictions or displays, of a prurient sexual nature;
(q) Unless waived by SBA for good cause, businesses that have
previously defaulted on a Federal loan or Federally assisted financing,
resulting in the Federal government or any of its agencies or
Departments sustaining a loss in any of its programs, and businesses
owned or controlled by an applicant or any of its Associates which
previously owned, operated, or controlled a business which defaulted on
a Federal loan (or guaranteed a loan which was defaulted) and caused
the Federal government or any of its agencies or Departments to sustain
a loss in any of its programs. For purposes of this section, a
compromise agreement shall also be considered a loss;
(r) Businesses primarily engaged in political or lobbying
activities; and
(s) Speculative businesses (such as oil wildcatting).
Sec. 120.111 What conditions must an Eligible Passive Company satisfy?
An Eligible Passive Company must use loan proceeds to acquire or
lease, and/or improve or renovate real or personal property (including
eligible refinancing) that it leases to an Operating Company for the
conduct of the Operating Company's business. Any ownership structure or
legal form may qualify as an Eligible Passive Company.
(a) Conditions that apply to all legal forms:
(1) The Operating Company must be an eligible small business, and
the proposed use of the proceeds must be an eligible use if the
Operating Company were obtaining the financing directly;
(2) The Eligible Passive Company (with the exception of a trust)
and the Operating Company each must be small under the appropriate size
standards in part 121 of this chapter;
(3) The lease between the Eligible Passive Company and the
Operating Company must be in writing and must be subordinated to SBA's
mortgage, trust deed lien, or security interest on the property. Also,
the Eligible Passive Company (as landlord) must furnish as collateral
for the loan an assignment of all rents paid under the lease;
(4) The lease between the Eligible Passive Company of the Operating
Company, including options to renew exercisable solely by the Operating
Company, must have a remaining term at least equal to the term of the
loan;
(5) The Operating Company must be a guarantor or a co-borrower
(with the Eligible Passive Company) of the loan (in a 7(a) loan
including working capital, the Operating Company must be a co-
borrower); and
(6) Each holder of an ownership interest constituting at least 20
percent of the Eligible Passive Company and the Operating Company must
guarantee the loan (the trustee shall execute the guarantee on behalf
of any trust).
(b) Additional conditions that apply to trusts. The eligibility
status of the trustor will determine trust eligibility. All donors to
the trust will be deemed to have trustor status for eligibility
purposes. A trust qualifying as an Eligible Passive Company may engage
in other activities as authorized by its trust agreement. The trustee
must warrant and certify that the trust will not be revoked or
substantially amended for the term of the loan without the consent of
SBA. The trustor must guarantee the loan. For purposes of this section,
the trustee shall certify to SBA that:
(1) The trustee has authority to act;
(2) The trust is not regarded as a grantor trust for tax purposes;
(3) The trust has the authority to borrow funds, pledge trust
assets, and lease the property to the Operating Company;
(4) The trustee has provided accurate, pertinent language from the
trust agreement confirming the above; and
(5) The trustee has provided and will continue to provide SBA with
a true and complete list of all trustors and donors.
Uses of Proceeds
Sec. 120.120 What are eligible uses of proceeds?
A small business must use an SBA business loan for sound business
purposes. The uses of proceeds are prescribed in each loan's
Authorization.
(a) A Borrower may use loan proceeds from any SBA loan to:
(1) Acquire land (by purchase or lease);
(2) Improve a site (e.g., grading, streets, parking lots,
landscaping), including up to 5 percent for community improvements such
as curbs and sidewalks;
(3) Purchase one or more existing buildings;
(4) Convert, expand or renovate one or more existing buildings;
(5) Construct one or more new buildings; and/or
(6) Acquire (by purchase or lease) and install fixed assets (for a
504 loan, these assets must have a useful life of at least 10 years and
be at a fixed location, although short-term financing for equipment,
furniture, and furnishings may be permitted where essential to and a
minor portion of the 504 Project).
(b) A Borrower may also use 7(a) and microloan proceeds for:
(1) Inventory;
(2) Supplies;
(3) Raw materials; and
(4) Working capital (if the Operating Company is a co-Borrower with
an Eligible Passive Company, part of the loan proceeds may be applied
for working capital if used for that purpose only by the Operating
Company).
(c) A Borrower may use 7(a) loan proceeds for refinancing certain
outstanding debts.
Sec. 120.130 Restrictions on uses of proceeds.
SBA will not authorize nor may a Borrower use loan proceeds for the
following purposes (including the replacement of funds used for any
such purpose):
(a) Payments, distributions or loans to Associates of the applicant
(except for ordinary compensation for services rendered);
(b) Refinancing a debt owed to a Small Business Investment Company
(``SBIC'');
(c) Floor plan financing or other revolving line credit, except
under Sec. 120.390;
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(d) Investments in real or personal property acquired and held
primarily for sale, lease, or investment (except for a loan to an
Eligible Passive Company or to a small contractor under Sec. 120.310);
(e) A purpose which does not benefit the small business; or
(f) Any use restricted by Secs. 120.201 through 120.203 and 120.884
(specific to 7(a) loans and 504 loans respectively).
Sec. 120.131 Leasing part of new construction or existing building to
another business.
(a) If the SBA business loan involves the construction of a new
building, a Borrower may lease up to 33% of the square footage of
rentable property (total square footage of all buildings or facilities
used for business operations) for a short term to any third party if
reasonable growth projections show that the Borrower will need
additional space within three years and will use all of the additional
space within ten years. If the Borrower is an Eligible Passive Company
leasing 100 percent of the Project space to an Operating Company, the
Operating Company may sublease up to 33 percent to a third party under
the same conditions.
(b) If the SBA business loan involves the acquisition, renovation,
or reconstruction of an existing building, the Borrower (or Operating
Company, if the Borrower is an Eligible Passive Company) must occupy at
least 51 percent of the Rentable Property. The balance of the Rentable
Property may be leased out to any third party, if the loan proceeds
were not used to remodel or convert the space to be leased out. (For
504 loans, see also Sec. 120.871.)
Ethical Requirements
Sec. 120.140 What ethical requirements apply to participants?
Lenders, Intermediaries, CDCs, and Associate Development Companies
(``ADCs'') (in this section, collectively referred to as
``Participants''), must act ethically and exhibit good character.
Ethical indiscretion of an Associate of a Participant or a member of a
CDC will be attributed to the Participant. A Participant must promptly
notify SBA if it obtains information concerning the unethical behavior
of an Associate. The following are examples of such unethical behavior.
A Participant may not:
(a) Self-deal;
(b) Have a real or apparent conflict of interest with a small
business with which it is dealing (including any of its Associates or
an Associate's Close Relatives) or SBA;
(c) Own an equity interest in a business that has received or is
applying to receive SBA financing (during the term of the loan or
within 6 months prior to the loan application);
(d) Be incarcerated, on parole, or on probation;
(e) Knowingly misrepresent or make a false statement to SBA;
(f) Engage in conduct reflecting a lack of business integrity or
honesty;
(g) Be a convicted felon, or have an adverse final civil judgment
(in a case involving fraud, breach of trust, or other conduct) that
would cause the public to question the Participant's business
integrity, taking into consideration such factors as the magnitude,
repetition, harm caused, and remoteness in time of the activity or
activities in question;
(h) Accept funding from any source that restricts, prioritizes, or
conditions the types of small businesses that the Participant may
assist under an SBA program or that imposes any conditions or
requirements upon recipients of SBA assistance inconsistent with SBA's
loan programs or regulations;
(i) Fail to disclose to SBA all relationships between the small
business and its Associates (including Close Relatives of Associates),
the Participant, and/or the lenders financing the Project of which it
is aware or should be aware;
(j) Fail to disclose to SBA whether the loan will:
(1) Reduce the exposure of a Participant or an Associate of a
Participant in a position to sustain a loss;
(2) Directly or indirectly finance the purchase of real estate,
personal property or services (including insurance) from the
Participant or an Associate of the Participant;
(3) Repay or refinance a debt due a Participant or an Associate of
a Participant; or
(4) Require the small business, or an Associate (including Close
Relatives of Associates), to invest in the Participant (except for
institutions which require an investment from all members as a
condition of membership, such as a Production Credit Association);
(k) Issue a real estate forward commitment to a builder or
developer; or
(l) Engage in any activity which taints its objective judgment in
evaluating the loan.
Credit Criteria for SBA Loans
Sec. 120.150 What are SBA's lending criteria?
The applicant (including an Operating Company) must be
creditworthy. Loans must be so sound as to reasonably assure repayment.
SBA will consider:
(a) Character, reputation, and credit history of the applicant (and
the Operating Company, if applicable), its Associates, and guarantors;
(b) Experience and depth of management;
(c) Strength of the business;
(d) Past earnings, projected cash flow, and future prospects;
(e) Ability to repay the loan with earnings from the business;
(f) Sufficient invested equity to operate on a sound financial
basis;
(g) Potential for long-term success;
(h) Nature and value of collateral (although inadequate collateral
will not be the sole reason for denial of a loan request); and
(i) The effect any affiliates (as defined in part 121 of this
chapter) may have on the ultimate repayment ability of the applicant.
Sec. 120.151 What is the statutory limit for total loans to a
Borrower?
The aggregate amount of the SBA portions of all loans to a single
Borrower, including the Borrower's affiliates as defined in part 121 of
this chapter, may not exceed a guarantee amount of $750,000, except as
otherwise authorized by statute for a specific loan program. The amount
of any loan received by an Eligible Passive Company applies to the loan
limit of both the Eligible Passive Company and the Operating Company.
Sec. 120.160 Loan conditions.
The following requirements are normally required by SBA for all
business loans:
(a) Personal guarantees. Holders of at least a 20 percent ownership
interest generally must guarantee the loan. SBA, in its discretion,
consulting with the Participating Lender, may require other appropriate
individuals to guarantee the loan as well, except SBA will not require
personal guarantees from those owning less than 5% ownership.
(b) Appraisals. SBA may require professional appraisals of the
applicant's and principals' assets, a survey, or a feasibility study.
(c) Hazard Insurance. SBA requires hazard insurance on all
collateral.
(d) Taxes. The applicant may not use any of the proceeds to pay
past-due Federal and state payroll taxes.
Requirements Imposed Under Other Laws and Orders
Sec. 120.170 Flood insurance.
Under the Flood Disaster Protection Act of 1973 (Sec. 205(b) of
Pub. L. 93-234; 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a loan
recipient must obtain flood insurance if any building (including
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mobile homes), machinery, or equipment acquired, installed, improved,
constructed, or renovated with the proceeds of SBA financial assistance
is located in a special flood hazard area. The requirement applies also
to any inventory (business loan program), fixtures or furnishings
contained or to be contained in the building. Mobile homes on a
foundation are buildings. SBA, Lenders, CDCs, and Intermediaries must
notify Borrowers that flood insurance must be maintained.
Sec. 120.171 Compliance with child support obligations.
Any holder of 50% or more of the ownership interest in the
recipient of an SBA loan must certify that he or she is not more than
60 days delinquent on any obligation to pay child support arising
under:
(a) An administrative order;
(b) A court order;
(c) A repayment agreement between the holder and a custodial
parent; or
(d) A repayment agreement between the holder and a State agency
providing child support enforcement services.
Sec. 120.172 Flood-plain and wetlands management.
(a) All loans must conform to requirements of Executive Orders
11988, ``Flood Plain Management'' (3 CFR, 1977 Comp., p. 117) and
11990, ``Protection of Wetlands'' (3 CFR, 1977 Comp., p. 121). Lenders,
Intermediaries, CDCs, and SBA must comply with requirements applicable
to them. Applicants must show:
(1) Whether the location for which financial assistance is proposed
is in a floodplain or wetland;
(2) If it is in a floodplain, that the assistance is in compliance
with local land use plans; and
(3) That any necessary construction or use permits will be issued.
(b) Generally, there is an 8-step decision making process with
respect to:
(1) Construction or acquisition of anything, other than a building;
(2) Repair and restoration equal to more than 50% of the market
value of a building; or
(3) Replacement of destroyed structures.
(c) SBA may determine for the following types of actions, on a
case-by-case basis, that the full 8-step process is not warranted and
that only the first step (determining if a proposed action is in the
base floodplain) need be completed:
(1) Actions located outside the base floodplain;
(2) Repairs, other than to buildings, that are less than 50% of the
market value;
(3) Replacement of building contents, materials, and equipment;
(4) Hazard mitigation measures;
(5) Working capital loans; or
(6) SBA loan assistance of $1,500,000 or less.
Sec. 120.173 Lead-based paint.
If loan proceeds are for the construction or rehabilitation of a
residential structure, lead-based paint may not be used on any interior
surface, or on any exterior surface that is readily accessible to
children under the age of seven years.
Sec. 120.174 Earthquake hazards.
When loan proceeds are used to construct a new building or an
addition to an existing building, the construction must conform with
the ``National Earthquake Hazards Reduction Program (``NEHRP'')
Recommended Provisions for the Development of Seismic Regulations for
New Buildings'' (which can be obtained from the Federal Emergency
Management Agency, Publications Office, Washington, D.C.) or a code
identified by SBA as being substantially equivalent.
Sec. 120.175 Coastal barrier islands.
SBA and Intermediaries may not make or guarantee any loan within
the Coastal Barrier Resource System.
Sec. 120.176 Compliance with other laws.
All SBA loans are subject to all applicable laws, including
(without limitation) the civil rights laws (see Parts 112, 113, 117 and
136 of this chapter), prohibiting discrimination on the grounds of
race, color, national origin, religion, sex, marital status, disability
or age. SBA requests agreements or evidence to support or document
compliance with these laws, including reports required by applicable
statutes or the regulations in this chapter.
Enforceability Despite Rule Changes
Sec. 120.180 Are rules enforceable if they are changed later?
Regulations and contractual provisions in effect at the time of a
transaction govern an SBA loan financing transaction, notwithstanding
subsequent rule or contract changes. SBA may conduct an enforcement
action regarding any violation of provisions of regulations or
contracts applicable at the time, but no longer in effect or in use.
Loan Applications
120.190 Where does an applicant apply for a loan?
An applicant for a business loan should apply to:
(a) A Lender for a guaranteed or immediate participation loan;
(b) A CDC for a 504 loan;
(c) An Intermediary for a Microloan; or
(d) SBA for a direct loan.
Sec. 120.191 The contents of a business loan application.
For most business loans, SBA requires that an application for a
business loan contain, among other things, a description of the history
and nature of the business, the amount and purpose of the loan, the
collateral offered for the loan, current financial statements,
historical financial statements (or tax returns if appropriate) for the
past three years, IRS tax verification, and a business plan, when
applicable. Personal histories and financial statements will be
required from principals of the applicant (and the Operating Company,
if applicable).
Sec. 120.192 Approval or denial.
Applicants receive notice of approval or denial by the Lender, CDC,
Intermediary, or SBA, as appropriate. Notice of denial will include the
reasons. If a loan is approved, an Authorization will be issued.
Sec. 120.193 Reconsideration after denial.
An applicant or recipient of a business loan may request
reconsideration of a denied loan or loan modification request within 6
months of denial. Applicants denied due to a size determination can
appeal that determination under part 121 of this chapter. All others
must be submitted to the office that denied the original request. To
prevail, the applicant must demonstrate that it has overcome all
legitimate reasons for denial. Six months after denial, a new
application is required. If the reconsideration is denied, a second and
final reconsideration may be considered by the Associate Administrator
for Financial Assistance (AA/FA), whose decision is final.
Computerized SBA Forms
Sec. 120.194 Use of computer forms.
Any Applicant or Participant may use computer generated SBA
application forms, closing forms, and other forms designated by SBA if
the forms are exact reproductions of SBA forms.
Reporting of Fees
[[Page 3243]]
Sec. 120.195 Disclosure of fees.
An Applicant for a business loan must identify to SBA the name of
each Agent as defined in part 103 of this chapter that helped the
applicant obtain the loan, describing the services performed, and
disclosing the amount of each fee paid or to be paid by the applicant
to the Agent in conjunction with the performance of those services.
Subpart B--Policies Specific to 7(a) Loans
Bonding Requirements
Sec. 120.200 What bonding requirements exist during construction?
On 7(a) loans which finance construction, the Borrower must supply
a 100 percent payment and performance bond and builder's risk
insurance, unless waived by SBA.
Limitations on Use of Proceeds
Sec. 120.201 Refinancing unsecured or undersecured loans.
A Borrower may not use 7(a) loan proceeds to pay any creditor in a
position to sustain a loss causing a shift to SBA of all or part of a
potential loss from an existing debt.
Sec. 120.202 Restrictions on loans for changes in ownership.
A Borrower may not use 7(a) loan proceeds to purchase a portion of
a business or a portion of another owner's interest. One or more
current owners may use loan proceeds to purchase the entire interest of
another current owner, or a Borrower can purchase ownership of an
entire business.
Maturities; Interest Rates; Loan and Guarantee Amounts
Sec. 120.210 What percentage of a loan may SBA guarantee?
SBA's guarantee percentage must not exceed the applicable
percentage established in section 7(a) of the Act. The maximum
allowable guarantee percentage on a loan will be determined by the loan
amount. As of October 12, 1995, the percentages are: Loans of $100,000
or less may receive a maximum guarantee of 80 percent. All other loans
may receive a maximum guarantee of 75 percent, not to exceed $750,000,
unless otherwise authorized by SBA.
Sec. 120.211 What limits are there on the amounts of direct loans?
(a) The statutory limit for direct loans made under the authority
of section 7(a)(1)-(19) of the Small Business Act is $350,000. SBA has
established an administrative limit of $150,000 for direct loans. The
AA/FA may authorize acceptance of an application up to the statutory
limit.
(b) The statutory limit for direct loans made under the authority
of section 7(a)(20) is $750,000. SBA has established an administrative
limit of $150,000. The Associate Administrator for Minority Enterprise
Development may authorize the acceptance of an application that exceeds
the administrative limit.
(c) The statutory limit on SBA's portion of an immediate
participation loan is $350,000. The administrative limit is the lesser
of 75 percent of the loan or $150,000. The AA/FA may authorize
exceptions to the administrative limit up to $350,000.
Sec. 120.212 What limits are there on loan maturities?
The term of a loan shall be:
(a) The shortest appropriate term, depending upon the Borrower's
ability to repay;
(b) Ten years or less, unless it finances or refinances real estate
or equipment with a useful life exceeding ten years; and
(c) A maximum of 25 years, including extensions. (A portion of a
loan used to acquire or improve real property may have a term of 25
years plus an additional period needed to complete the construction or
improvements.)
Sec. 120.213 What fixed interest rates may a Lender charge?
(a) Fixed Rates for Guaranteed Loans. A loan may have a reasonable
fixed interest rate. SBA periodically publishes the maximum allowable
rate in the Federal Register.
(b) Direct loans. A statutory formula based on the cost of money to
the Federal government determines the interest rate on direct loans.
SBA publishes the rate periodically in the Federal Register.
Sec. 120.214 What conditions apply for variable interest rates?
A Lender may use a variable rate of interest, upon SBA's approval.
SBA's maximum allowable rates apply only to the initial rate on the
date SBA received the loan application. SBA shall approve the use of a
variable interest rate under the following conditions:
(a) Frequency. The first change may occur on the first calendar day
of the month following initial disbursement, using the base rate (see
paragraph (c) of this section) in effect on the first business day of
the month. After that, changes may occur no more often than monthly.
(b) Range of fluctuation. The amount of fluctuation shall be equal
to the movement in the base rate. The difference between the initial
rate and the ceiling rate may be no greater than the difference between
the initial rate and the floor rate.
(c) Base rate. The base rate shall be the prime rate in effect on
the first business day of the month, printed in a national financial
newspaper published each business day, or the SBA Optional Peg Rate
which SBA publishes quarterly in the Federal Register.
(d) Maturities under 7 years. For loans with maturities under seven
years, the maximum interest rate shall not exceed two and one-quarter
(2 1/4 ) percentage points over the base rate.
(e) Maturities of 7 years or more. For loans with maturities of
seven or more years, the maximum interest rate shall not exceed two and
three-quarters (2 3/4 ) percentage points over the base rate.
(f) Amortization. Initial amortization of principal and interest
may be recomputed and reassessed as interest rates fluctuate, as
directed by SBA. With prior approval of SBA, the Lender may use certain
other amortization methods, except that SBA does not allow balloon
payments.
Sec. 120.215 What interest rates apply to smaller loans?
For a loan over $25,000 but not exceeding $50,000, the interest
rate may be one percent more than the maximum interest rate described
above. For a variable rate loan of $25,000 or less, the maximum
interest rate described above may be increased by two percentage
points.
Fees for Guaranteed Loans
Sec. 120.220 Fees that Lender pays SBA.
(a) The Lender pays a guarantee fee to SBA for each loan as
follows:
----------------------------------------------------------------------------------------------------------------
Fee measured as Lender may get
Guaranteed portion of loan percentage of When payable fee from When SBA refunds fee
guaranteed portion borrower from borrower
----------------------------------------------------------------------------------------------------------------
12 Months or less............. 25%.................. With Guarantee When SBA If Application
Application. Approves Loan. Withdrawn or
Denied.\1\
[[Page 3244]]
More Than 12 months and Total 2.0% of Guaranteed Within 90 days After First If Loan Cancelled and
Guaranteed Portion Is $80,000 Portion. of SBA Approval. Disbursement. Never Disbursed.
or Less.
More Than 12 Months and Amount 3%................... Within 90 Days After First If Loan Cancelled and
of Guaranteed Portion of Loan of SBA Approval. Disbursement. Never Disbursed.
That Is $250,000 or Less.
More Than 12 Months and Amount 3.0% of 1st $250,000 Within 90 Days After First If Loan Cancelled and
of Guaranteed Portion of Loan plus 3.5% of balance. of SBA Approval. Disbursement. Never Disbursed.
Between $250,000 and $500,000.
More Than 12 Months and Amount 3.0% of 1st $250,000 Within 90 Days After First If Loan Cancelled and
of Guaranteed Portion of Loan plus 3.5% of next of SBA Approval. Disbursement. Never Disbursed.
Exceeding $500,000. $250,000 plus 3.875%
of the Amount
Exceeding $500,000.
----------------------------------------------------------------------------------------------------------------
\1\ Also, if SBA substantially changes the Lender's loan terms and approves the loan, but the modified terms are
unacceptable to the Borrower or Lender. (The Lender must request refund in writing within 30 calendar days of
the approval).
(b) If the guarantee fee is not paid, SBA may terminate the
guarantee. The Borrower may use working capital loan proceeds to
reimburse the Lender for the guarantee fee. Acceptance of the guarantee
fee by SBA shall not waive any right of SBA arising from the Lender's
misconduct or violation of any provision of this part, the guarantee
agreement, the Authorization, or other loan documents.
(c) The Lender shall also pay SBA an annual service fee equal to
0.5 percent of the outstanding balance of the guaranteed portion of
each loan. The service fee cannot be charged to the Borrower. SBA may
institute a late fee charge for delinquent payments of the annual
service fee to cover administrative costs associated with collecting
delinquent fees.
Sec. 120.221 Fees which the Lender may collect from a loan applicant.
(a) Service and packaging fees. The Lender may charge an applicant
reasonable fees (customary for similar Lenders in the geographic area
where the loan is being made) for packaging and other services. The
Lender must advise the applicant in writing that the applicant is not
required to obtain or pay for unwanted services. The applicant is
responsible for deciding whether fees are reasonable. SBA may review
these fees at any time. Lender must refund any such fee considered
unreasonable by SBA.
(b) Extraordinary servicing. Subject to prior written SBA approval,
if all or part of a loan will have extraordinary servicing needs, the
Lender may charge the applicant a service fee not to exceed 2 percent
per year on the outstanding balance of the part requiring special
servicing.
(c) Out-of-pocket expenses. The Lender may collect from the
applicant necessary out-of-pocket expenses such as filing or recording
fees.
(d) Late payment fee. The Lender may charge the Borrower a late
payment fee not to exceed 5 percent of the regular loan payment.
(e) No prepayment fee. The Lender may not charge a fee for full or
partial prepayment of a loan.
Sec. 120.222 Fees which the Lender or Associate may not collect from
the Borrower or share with third parties.
The Lender or its Associate may not:
(a) Require the applicant or Borrower to pay the Lender, an
Associate, or any party designated by either, any fees or charges for
goods or services, including insurance, as a condition for obtaining an
SBA guaranteed loan (unless permitted by this part);
(b) Charge an applicant any commitment, bonus, broker, commission,
referral or similar fee;
(c) Charge points or add-on interest;
(d) Share any premium received from the sale of an SBA guaranteed
loan in the secondary market with a Service Provider, packager, or
other loan-referral source; or
(e) Charge the Borrower for legal services, unless they are hourly
charges for requested services actually rendered.
Subpart C--Special Purpose Loans
Sec. 120.300 Statutory authority.
Congress has authorized several special purpose programs in various
subsections of section 7(a) of the Act. Generally, 7(a) loan policies,
eligibility requirements and credit criteria enumerated in Subpart B of
this part apply to these programs. The sections of this subpart
prescribe the special conditions applying to each special purpose
program. As with other business loans, special purpose loans are
available only to the extent funded by annual appropriations.
Disabled Assistance Loan Program (DAL)
Sec. 120.310 What assistance is available for the disabled?
Section 7(a)(10) of the Act authorizes SBA to guarantee or make
direct loans to the disabled. SBA distinguishes two kinds of
assistance:
(a) DAL-1. DAL-1 Financial Assistance is available to non-profit
public or private organizations for disabled individuals that employ
such individuals; or
(b) DAL-2. DAL-2 Financial Assistance is available to:
(1) Small businesses wholly owned by disabled individuals; and
(2) Disabled individuals to establish, acquire, or operate a small
business.
Sec. 120.311 Definitions.
(a) Organization for the disabled means one which:
(1) Is organized under federal or state law to operate in the
interest of disabled individuals;
(2) Is non-profit;
(3) Employs disabled individuals for seventy-five percent of the
time needed to produce commodities or services for sale; and
(4) Complies with occupational and safety standards prescribed by
the Department of Labor.
(b) Disabled individual means a person who has a permanent
physical, mental or emotional impairment, defect, ailment, disease or
disability which limits the type of employment for which the person
would otherwise be qualified.
Sec. 120.312 DAL-1 use of proceeds and other program conditions.
(a) DAL-1 applicants must submit appropriate documents to establish
program eligibility.
[[Page 3245]]
(b) Generally, applicants may use loan proceeds for any 7(a) loan
purposes. Loan proceeds may not be used:
(1) To purchase or construct facilities if construction grants and
mortgage assistance are available from another Federal source; or
(2) For supportive services (expenses incurred by a DAL-1
organization to subsidize wages of low producers, health and
rehabilitation services, management, training, education, and housing
of disabled workers).
(c) SBA does not consider a DAL-1 organization to have a conflict
of interest if one or more of its Associates is an Associate of the
Lender.
Sec. 120.313 DAL-2 use of proceeds and other program conditions.
(a) The DAL-2 loan proceeds may be used for any 7(a) loan purposes.
(b) An applicant may use DAL-2 loan proceeds to acquire an eligible
small business without complying with the change of ownership
conditions in Sec. 120.202.
(c) A DAL-2 applicant must submit evidence from a physician,
psychiatrist, or other qualified professional as to the permanent
nature of the disability and the limitation it places on the applicant.
Sec. 120.314 Resolving doubts about creditworthiness.
For the purpose of the DAL Program, SBA shall resolve doubts
concerning the creditworthiness of an applicant in favor of the
applicant. However, the applicant must present satisfactory evidence of
repayment ability. Personal guarantees of Associates are not required
for purposes of DAL-1 financial assistance.
Sec. 120.315 Interest rate and loan limit.
The interest rate on direct DAL loans is three percent. There is an
administrative limit of $150,000 on a direct DAL loan.
Businesses Owned by Low Income Individuals
Sec. 120.320 Policy.
Section 7(a)(11) of the Act authorizes SBA to guarantee or make
direct loans to establish, preserve or strengthen small business
concerns:
(a) Located in an area having high unemployment according to the
Department of Labor;
(b) Located in an area in which a high percentage of individuals
have a low income inadequate to satisfy basic family needs; and
(c) More than 50 percent owned by low income individuals.
Energy Conservation
Sec. 120.330 Who is eligible for an energy conservation loan?
SBA may make or guarantee loans to assist a small business to
design, engineer, manufacture, distribute, market, install, or service
energy devices or techniques designed to conserve the Nation's energy
resources.
Sec. 120.331 What devices or techniques are eligible for a loan?
Eligible energy conservation devices or techniques include:
(a) Solar thermal equipment;
(b) Photovoltaic cells and related equipment;
(c) A product or service which increases the energy efficiency of
existing equipment, methods of operation or systems which use fossil
fuels, and which is on the Energy Conservation Measures list of the
Secretary of Energy;
(d) Equipment producing energy from wood, biological waste, grain
or other biomass energy sources;
(e) Equipment for cogeneration of energy, district heating or
production of energy from industrial waste;
(f) Hydroelectric power equipment;
(g) Wind energy conversion equipment; and
(h) Engineering, architectural, consulting, or other professional
services necessary or appropriate for any of the devices or techniques
in paragraphs (a) through (g) of this section.
Sec. 120.332 What are the eligible uses of proceeds?
(a) Acquire property. The Borrower may use the loan proceeds to
acquire land necessary for imminent plant construction, buildings,
machinery, equipment, furniture, fixtures, facilities, supplies, and
material needed to accomplish any of the eligible program purposes in
Sec. 120.330.
(b) Research and development. Up to 30% of loan proceeds may be
used for research and development:
(1) Of an existing product or service; or
(2) A new product or service.
(c) Working capital. The Borrower may use proceeds for working
capital for entering or expanding in the energy conservation market.
Sec. 120.333 Are there any special credit criteria?
In addition to regular credit evaluation criteria, SBA shall weigh
the greater risk associated with energy projects. SBA shall consider
such factors as quality of the product or service, technical
qualifications of the applicant's management, sales projections, and
financial status.
Export Working Capital Program (EWCP)
Sec. 120.340 What is the Export Working Capital Program?
Under the EWCP, SBA guarantees short-term working capital loans
made by participating lenders to exporters (section 7(a)(14) of the
Act). Loan maturities may be for up to three years with annual
renewals. Proceeds can be used only to finance export transactions.
Loans can be for single or multiple export transactions. An export
transaction is the production and payment associated with a sale of
goods or services to a foreign buyer.
Sec. 120.341 Who is eligible?
In addition to the eligibility criteria applicable to all 7(a)
loans, an applicant must be in business for one full year at the time
of application, but not necessarily in the exporting business. SBA may
waive this requirement if the applicant has sufficient export trade
experience or other managerial experience.
Sec. 120.342 What are eligible uses of proceeds?
Loan proceeds may be used:
(a) To acquire inventory;
(b) To pay the manufacturing costs of goods for export;
(c) To purchase goods or services for export;
(d) To support standby letters of credit;
(e) For pre-shipment working capital; and
(f) For post-shipment foreign accounts receivable financing.
Sec. 120.343 Collateral.
A Borrower must give SBA a first security interest sufficient to
cover 100 percent of the EWCP loan amount (such as insured accounts
receivable or letters of credit). Collateral must be located in the
United States, its territories or possessions.
Sec. 120.344 Unique requirements of the EWCP.
(a) An applicant must submit cash flow projections to support the
need for the loan and the ability to repay. After the loan is made, the
loan recipient must submit continual progress reports.
(b) SBA does not limit the amount of extraordinary servicing fees,
as referenced in Sec. 120.221(b), under the EWCP.
(c) SBA does not prescribe the interest rates for the EWCP, but
will monitor these rates for reasonableness.
International Trade Loans
[[Page 3246]]
Sec. 120.345 Policy.
Section 7(a)(16) of the Act authorizes SBA to guarantee loans to
small businesses that are:
(a) Engaged or preparing to engage in international trade; or
(b) Adversely affected by import competition.
Sec. 120.346 Eligibility.
(a) An applicant must establish that:
(1) The loan proceeds will significantly expand an existing export
market or develop new export markets; or
(2) The applicant business is adversely affected by import
competition; and
(3) Upgrading facilities or equipment will improve the applicant's
competitive position.
(b) The applicant must have a business plan reasonably supporting
its projected export sales.
Sec. 120.347 Use of proceeds.
The Borrower may use loan proceeds to acquire, construct, renovate,
modernize, improve, or expand facilities and equipment to be used in
the United States to produce goods or services involved in
international trade, and to develop and penetrate foreign markets.
Sec. 120.348 Amount of guarantee.
SBA can guarantee up to $1,250,000 for a combination of fixed-asset
financing and working capital, supplies and EWCP assistance. The fixed-
asset portion of the loan cannot exceed $1,000,000 and the non-fixed-
asset portion cannot exceed $750,000.
Qualified Employee Trusts (ESOP)
Sec. 120.350 Policy.
Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to a
qualified employee trust (``ESOP'') to:
(a) Help finance the growth of its employer's small business; or
(b) Purchase ownership or voting control of the employer.
Sec. 120.351 Definitions.
All terms specific to ESOPs have the same definition for purposes
of this section as in the Internal Revenue Service (IRS) Code (title 26
of the United States Code) or regulations (26 CFR chapter I).
Sec. 120.352 Use of proceeds.
Loan proceeds may be used for two purposes.
(a) Qualified employer securities. A qualified employee trust may
relend loan proceeds to the employer by purchasing qualified employer
securities. The small business concern may use these funds for any
general 7(a) purpose.
(b) Control of employer. A qualified employee trust may use loan
proceeds to purchase a controlling interest (51 percent) in the
employer. Ownership and control must vest in the trust by the time the
loan is repaid.
Sec. 120.353 Eligibility.
SBA may assist a qualified employee trust (or equivalent trust)
that meets the requirements and conditions for an ESOP prescribed in
all applicable IRS, Treasury and Department of Labor (DOL) regulations.
In addition, the following conditions apply:
(a) The small business must provide the funds needed by the trust
to repay the loan; and
(b) The small business must provide adequate collateral.
Sec. 120.354 Creditworthiness.
In determining repayment ability, SBA shall not consider the
personal assets of the employee-owners of the trust. SBA shall consider
the earnings history and projected future earnings of the employer
small business. SBA may consider the business and management experience
of the employee-owners.
Veterans Loan Program
Sec. 120.360 Which veterans are eligible?
SBA may guarantee or make direct loans to a small business 51
percent owned by one or more of the following eligible veterans:
(a) Vietnam-era veterans who served for a period of more than 180
days between August 5, 1964, and May 7, 1975, and were discharged other
than dishonorably;
(b) Disabled veterans of any era with a minimum compensable
disability of 30 percent; or
(c) A veteran of any era who was discharged for disability.
Sec. 120.361 Other conditions of eligibility.
(a) Management and daily operations of the business must be
directed by one or more of the veteran owners whose veteran status was
used to qualify for the loan.
(b) This direct loan program is available only if private sector
financing and guaranteed loans are not available.
(c) A veteran may qualify only once for this program on a direct
loan basis.
Pollution Control Program
Sec. 120.370 Policy.
Section 7(a)(12) of the Act authorizes SBA to guarantee loans up to
$1,000,000 to an eligible small business to plan, design or install a
pollution control facility. An applicant must meet the eligibility
requirements for 7(a) loans.
Loans to Participants in the 8(a) Program
Sec. 120.375 Policy.
Section 7(a)(20) of the Act authorizes SBA to provide direct
(unilaterally or together with Lenders) or guaranteed loans to firms
participating in the 8(a) Program.
Sec. 120.376 Special requirements.
The following special conditions apply (otherwise, 7(a) loan
eligibility criteria apply):
(a) The Associate Administrator of Minority Enterprise Development
(``MED'') may waive the direct loan administrative ceiling of $150,000,
and raise it to $750,000.
(b) The SBA portion of a guaranteed loan must not exceed $750,000.
(c) The interest rate on a guaranteed loan shall be the same as on
7(a) guaranteed business loans. The interest rate on a direct loan
shall be one percent less than on a regular direct loan.
(d) For a direct loan or SBA's portion of an immediate
participation loan, SBA shall subordinate its security interest on all
collateral to other debt of the applicant.
Sec. 120.377 Use of proceeds.
The loan proceeds shall not be used for debt refinancing. Only a
manufacturing concern may use loan proceeds for working capital.
Defense Economic Transition Assistance
Sec. 120.380 Program.
Section 7(a)(21) of the Act authorizes SBA to guarantee loans to
help eligible small businesses transition from defense to civilian
markets, or eligible individuals adversely impacted by base closures or
defense cutbacks to acquire or open and operate a small business.
Sec. 120.381 Eligibility.
(a) Eligible small businesses. A small business is eligible if it
has been detrimentally impacted by the closure (or substantial
reduction) of a Department of Defense installation, or the termination
(or substantial reduction) of a Department of Defense Program on which
the small business was a prime contractor, subcontractor, or supplier
at any tier.
(b) Eligible individual. An eligible individual, for purposes of
this program, includes the following persons involuntarily separated
from their position or voluntarily terminated under a program offering
inducements to encourage early retirement:
[[Page 3247]]
(1) A member of the Armed Forces of the United States (honorably
discharged);
(2) A civilian employee of the Department of Defense; or
(3) An employee of a prime contractor, sub-contractor, or supplier
at any tier of a Department of Defense program.
(c) Defense loan and technical assistance (DELTA). The DELTA
program provides financial and technical assistance to defense
dependent small businesses which have been adversely affected by
defense reductions. The goal of the program is to assist these
businesses to diversify into the commercial market while remaining part
of the defense industrial base. Complete information on eligibility and
other rules is available from each SBA district office.
Sec. 120.382 Repayment ability.
SBA shall resolve reasonable doubts concerning the small business'
proposed business plan for transition to non-defense-related markets in
favor of the loan applicant in determining the sound value of the
proposed loan.
Sec. 120.383 Restrictions on loan processing.
Since greater risk may be associated with a loan to an applicant
under this program, a Certified Lender or Preferred Lender shall not
make a defense economic assistance loan under the PLP or CLP programs.
CapLines Program
Sec. 120.390 Revolving credit.
(a) CapLines finances eligible small businesses' short-term,
revolving and non-revolving working-capital needs. SBA regulations
governing the 7(a) loan program govern business loans made under this
program. Under CapLines, SBA generally can guarantee up to $750,000.
(b) CapLines proceeds can be used to finance the cyclical,
recurring, or other identifiable short-term operating capital needs of
small businesses. Proceeds can be used to create current assets or used
to provide financing against the current assets that already exist.
Builders Loan Program
Sec. 120.391 What is the Builders Loan Program?
Under section 7(a)(9) of the Act, SBA may make or guarantee loans
to finance small general contractors to construct or rehabilitate
residential or commercial property for resale. This program provides an
exception under specified conditions to the general rule against
financing investment property. ``Construct'' and ``rehabilitate'' mean
only work done on-site to the structure, utility connections and
landscaping.
Sec. 120.392 Who may apply?
A construction contractor or home-builder with a past history of
profitable construction or rehabilitation projects of comparable type
and size may apply. An applicant may subcontract the work. Subcontracts
in excess of $25,000 may require 100 percent payment and performance
bonds.
Sec. 120.393 Are there special application requirements?
(a) An applicant must submit documentation from:
(1) A mortgage lender indicating that permanent mortgage money is
available to qualified purchasers to buy such properties;
(2) A real estate broker indicating that a market exists for the
proposed building and that it will be compatible with its neighborhood;
and
(3) An architect, appraiser or engineer agreeing to make
inspections and certifications to support interim disbursements.
(b) The Borrower may substitute a letter from a qualified Lender
for one or more of the letters.
Sec. 120.394 What are the eligible uses of proceeds?
A Borrower must use the loan proceeds solely to acquire, construct
or substantially rehabilitate an individual residential or commercial
building for sale. ``Substantial'' means rehabilitation expenses of
more than one-third of the purchase price or fair market value at the
time of the application. A Borrower may use up to 20 percent of the
proceeds to acquire land, and up to 5 percent for community
improvements such as curbs and sidewalks.
Sec. 120.395 What is SBA's collateral position?
SBA will require a lien on the building which must be in no less
than a second position.
Sec. 120.396 What is the term of the loan?
The loan must not exceed sixty (60) months plus the estimated time
to complete construction or rehabilitation.
Sec. 120.397 Are there any special restrictions?
The borrower must not use loan proceeds to purchase vacant land for
possible future construction or to operate or hold rental property for
future rehabilitation. SBA may allow rental of the property only if the
rental will improve the ability to sell the property. The sale must be
a legitimate change of ownership.
Subpart D--Lenders
Sec. 120.400 Loan Guarantee Agreements.
SBA may enter into a Loan Guarantee Agreement with a Lender to make
deferred participation (guaranteed) loans. Such an agreement does not
obligate SBA to participate in any specific proposed loan that a Lender
may submit. The existence of a Loan Guarantee Agreement does not limit
SBA's rights to deny a specific loan or establish general policies. See
also Secs. 120.441(b) and 120.451(d) concerning Supplemental Guarantee
Agreements.
Participation Criteria
Sec. 120.410 Requirements for all participating Lenders.
A Lender must:
(a) Have a continuing ability to evaluate, process, close,
disburse, service and liquidate small business loans;
(b) Be open to the public for the making of such loans (not be a
financing subsidiary, engaged primarily in financing the operations of
an affiliate);
(c) Have continuing good character and reputation, and otherwise
meet and maintain the ethical requirements of Sec. 120.140; and
(d) Be supervised and examined by a State or Federal regulatory
authority, satisfactory to SBA.
Sec. 120.411 Preferences.
An agreement to participate under the Act may not establish any
Preferences in favor of the Lender.
Sec. 120.412 Other services Lenders may provide Borrowers.
Subject to Sec. 120.140 Lenders, their Associates or the designees
of either may provide services to and contract for goods with a
Borrower only after full disbursement of the loan to the small business
or to an account not controlled by the Lender, its Associate, or the
designee. A Lender, an Associate, or a designee providing such services
must do so under a written contract with the small business, based on
time and hourly charges, and must maintain time and billing records for
examination by SBA. Fees cannot exceed those charged by established
professional consultants providing similar services. See also
Sec. 120.195.
Sec. 120.413 Advertisement of relationship with SBA.
A Lender may refer in its advertising to its participation with
SBA. The advertising may not:
(a) State or imply that the Lender, or any of its Borrowers, has or
will receive preferential treatment from SBA;
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(b) Be false or misleading; or
(c) Make use of SBA's seal.
Pledging Notes or Transferring Unguaranteed Portion
Sec. 120.420 Financings by Nondepository Lenders.
(a) A Small Business Lending Company regulated by SBA or a Business
and Industrial Development Company (``Nondepository Lender'') may
pledge the notes evidencing SBA guaranteed loans or sell the
unguaranteed portions of such loans if SBA, notwithstanding the
provisions of Sec. 120.453(c), in its sole discretion, gives its prior
written consent. The Lender must be secure financially and have a
history of compliance with SBA's regulations and any other applicable
state or Federal statutory and regulatory requirements.
(b) The Nondepository Lender, SBA, and any th
FR Doc. 96-1432 Business Loan Programs
ird party involved in
the transaction, as determined by SBA in its sole discretion, must
enter into a written agreement satisfactory to SBA acknowledging SBA's
interest as guarantor of the subject loans and accepting that all
relevant third parties agree to recognize and uphold those interests
under the Act, this part, and the contractual provisions of SBA's Loan
Guarantee Agreement. In any such agreement, the parties must agree to
the following conditions:
(1) The Nondepository Lender, SBA, or a third party custodian
agreeable to SBA, will hold all pertinent Loan Instruments, and the
Nondepository Lender will continue to service the loans after the
pledge or transfer is made; and
(2) The Nondepository Lender must retain an economic risk in and
bear the ultimate risk of loss on the unguaranteed portions. This must
be demonstrated to SBA's satisfaction by establishing a sufficient
reserve fund at the time of sale of the unguaranteed portions and, in
the case of pledging notes, by retaining all of the economic interest
in the unguaranteed portion of any loan which a note evidences.
(c) The Nondepository Lender may not use SBA guaranteed loans or
the collateral supporting such loans as collateral for any borrowing
not related to financing of the guaranteed or unguaranteed portion of
SBA loans.
Miscellaneous Provisions
Sec. 120.430 SBA access to Lender files.
A Lender must allow SBA's authorized representatives, during normal
business hours, access to its files to review, inspect and copy all
records and documents relating to SBA guaranteed loans.
Sec. 120.431 Suspension or revocation of eligibility to participate.
SBA may suspend or revoke the eligibility of a Lender to
participate in the 7(a) program because of a violation of SBA
regulations, a breach of any agreement with SBA, a change of
circumstance resulting in the Lender's inability to meet operational
requirements, or a failure to engage in prudent lending practices.
Proceedings for such purposes will be conducted in accordance with the
provisions of part 134 of this chapter. A suspension or revocation will
not invalidate a guarantee previously provided by SBA.
Certified Lenders Program (CLP)
Sec. 120.440 What is the Certified Lenders Program?
Under the Certified Lenders Program (CLP), designated Lenders
process, close, service, and may liquidate, SBA guaranteed loans. SBA
gives priority to applications and servicing actions submitted by
Lenders under this program, and attempts to respond within three days
of submission to SBA. All other rules in this part 120 relating to the
operations of Lenders apply to CLP Lenders.
Sec. 120.441 How does a Lender become a CLP Lender?
(a) An SBA field office may nominate a Lender or a Lender may
request a field office to consider it for CLP status. SBA district
directors may approve and renew a Lender's CLP status. The district
director will consider whether the Lender:
(1) Has the ability to process, close, service and liquidate loans;
(2) Has a satisfactory performance history with SBA, including the
submission of complete and accurate loan guarantee application
packages;
(3) Has an acceptable SBA purchase rate; and
(4) Has shown the ability to work well with the local SBA office.
(b) If the district director does not approve a request for CLP
status, the Lender may appeal to the AA/FA, whose decision will be
final. If SBA grants CLP status, it applies only in the field office
that processed the CLP designation. A CLP Lender must execute a
Supplemental Guarantee Agreement that will specify a term not to exceed
two years.
Sec. 120.442 Suspension or revocation of CLP status.
The AA/FA may suspend or revoke CLP status upon written notice
providing the reasons at least 10 business days prior to the effective
date of the suspension or revocation. Reasons for suspension or
revocation may include a loan performance record unacceptable to SBA,
failure to make the required number of loans under the expedited
procedures, or violations of applicable statutes, regulations or
published SBA policies and procedures. A CLP Lender may appeal the
suspension or revocation made under this section under procedures found
in part 134 of this chapter. The action of the AA/FA remains in effect
pending resolution of the appeal.
Preferred Lenders Program (PLP)
Sec. 120.450 What is the Preferred Lenders Program?
Under the Preferred Lenders Program (PLP), designated Lenders
process, close, service, and liquidate SBA guaranteed loans with
reduced requirements for documentation to and prior approval by SBA.
Sec. 120.451 How does a Lender become a PLP Lender?
(a) An SBA field office serving the area in which a Lender's office
is located can nominate the Lender, or a Lender can request a field
office to consider it for PLP status. The SBA field office will forward
its recommendation to an SBA centralized loan processing center which
will submit its recommendation and supporting documentation to the AA/
FA for final decision.
(b) In making its decision, SBA considers whether the Lender:
(1) Has the required ability to process, close, service and
liquidate loans;
(2) Has the ability to develop and analyze complete loan packages;
and
(3) Has a satisfactory performance history with SBA.
(c) If the Lender is approved, the AA/FA will designate the area in
which it can make PLP loans.
(d) Before it can operate as a PLP Lender, the approved Lender must
execute a Supplemental Guarantee Agreement, which will specify a term
not to exceed two years.
(e) When a PLP's Supplemental Guarantee Agreement expires, SBA may
recertify it as a PLP Lender for an additional term not to exceed two
years. Prior to recertification, SBA will review a PLP Lender's loans,
policies and procedures. The recertification decision of the AA/FA is
final.
(f) A PLP Lender may request an expansion of the territory in which
it can process PLP loans by submitting its request to a loan processing
center. The center will obtain the recommendation of each SBA office in
the area into which the PLP Lender would like to expand its PLP
operations. The center
[[Page 3249]]
will forward the recommendations to the AA/FA for final decision. If a
PLP Lender is not a CLP Lender in a territory into which it seeks to
expand its PLP status, it automatically obtains CLP status in that
territory when it is granted PLP status for the territory.
Sec. 120.452 What are the requirements of PLP loan processing?
(a) Subparts A and B of this part govern the making of PLP loans,
except for the following:
(1) Certain types of businesses, loans, and loan programs are not
eligible for PLP, as detailed in published SBA policy and procedures.
(2) A Lender may not make a PLP business loan which reduces its
existing credit exposure for any Borrower, except in cases where an
interim loan(s) has been made for other than real estate construction
purposes to the Borrower which was approved by the Lender within 90
days of receipt of the issuance fo a subsequent PLP loan number.
(3) SBA will not guarantee more than the specified statutory
percentage of any PLP loan.
(b) A PLP Lender notifies SBA of its approval of a PLP loan by
submitting to SBA's loan processing center appropriate documentation
signed by two of the PLP's authorized representatives. SBA will attach
the SBA guarantee and notify the PLP Lender of the SBA loan number (if
it does not identify a problem with eligibility, and funds are
available).
(c) The PLP Lender is responsible for all PLP loan decisions
regarding eligibility (including size) and creditworthiness. The PLP
Lender is also responsible for confirming that all PLP loan closing
decisions are correct, and that it has complied with all requirements
of law and SBA regulations.
Sec. 120.453 What are the requirements of a PLP Lender in servicing
and liquidating SBA guaranteed loans?
The PLP Lender must service and liquidate its SBA guaranteed loan
portfolio (including its non-PLP loans) using generally accepted
commercial banking standards employed by prudent lenders. The PLP
Lender must liquidate any defaulted SBA guaranteed loan in its
portfolio unless SBA advises in writing that SBA will liquidate the
loan. The PLP Lender must submit a liquidation plan to SBA prior to
commencing liquidation action. The PLP Lender may take any necessary
servicing action, or liquidation action consistent with a plan, for any
SBA guaranteed loan in its portfolio, except it may not:
(a) Take any action that confers a Preference on the Lender;
(b) Accept a compromise settlement without prior written SBA
consent; and
(c) Sell or pledge more than 90 percent of a PLP loan.
Sec. 120.454 PLP performance review.
SBA may review the performance of a PLP Lender. SBA may charge the
PLP Lender a fee to cover the costs of this review.
Sec. 120.455 Suspension or revocation of PLP status.
The AA/FA may suspend or revoke PLP status upon written notice
providing the reasons at least 10 business days prior to the effective
date of the suspension or revocation. Reasons for suspension or
revocation may include loan performance unacceptable to SBA, failure to
make the required number of loans under the expedited procedures, or
violations of applicable statutes, regulations or published SBA
policies and procedures. A PLP Lender may appeal the suspension or
revocation made under this section under procedures found in part 134
of this chapter. The action of the AA/FA remains in effect pending
resolution of the appeal.
Small Business Lending Companies (SBLC)
Sec. 120.470 What is an SBLC?
A Small Business Lending Company (SBLC) is a nondepository lending
institution licensed by SBA. SBA supervises, examines, and regulates
SBLCs. An SBLC is subject to all applicable SBA regulations, including
those governing Lenders. SBA has imposed a moritorium on licensing new
SBLC's since January, 1982.
(a) An SBLC may only make:
(1) Loans under section 7(a) (except section 7(a)(13)) of the Act
in participation with SBA; and/or
(2) SBA guaranteed loans to micro-Lenders in the SBA Microloan
program (see subpart G of this part). Such loans are subject to the
same conditions as guaranteed loans made to SBA-designated microlenders
by SBA participating Lenders.
(b) In addition to complying with Secs. 120.400 through 120.413, an
SBLC must meet the following requirements:
(1) Business structure. It must be a corporation (profit or non-
profit).
(2) Written agreement. It must sign a written agreement with SBA.
(3) Capital structure. It must have unencumbered paid-in capital
and paid-in surplus of at least $1,000,000, or ten percent of the
aggregate of its share of all outstanding loans, whichever is more.
(4) Capital impairment. It must avoid capital impairment at all
times. Impairment exists if the retained earnings deficit of an SBLC
exceeds 50 percent of combined paid-in capital and paid-in-surplus,
excluding treasury stock. An SBLC must give SBA prompt written notice
of any capital impairment within 30 calendar days of the month-end
financial report that first reflects the impairment. Until the
impairment is cured, an SBLC may not present any loans to SBA for
guarantee.
(5) Issuance of securities. Without prior written SBA approval, it
must not issue any securities (including stock options and debt
securities) except stock dividends and common stock issued for cash or
direct obligations of, or obligations fully guaranteed as to principal
and interest by, the United States.
(6) Voluntary capital reduction. Without prior written SBA
approval, it must not voluntarily reduce its capital, or purchase and
hold more than 2 percent of any class or combination of classes of its
stock.
(7) Reserves for losses. It must maintain a reserve in the amount
of anticipated losses on loans and receivables.
(8) Internal control. It must adopt a plan designed to safeguard
its funds and other assets, to assure the reliability of its personnel,
and to maintain the accuracy of its financial data.
(9) Dual control. It must maintain dual control over disbursement
of funds and withdrawal of securities. An SBLC may disburse funds only
by checks or wire transfers authorized by signatures of two or more
officers covered by the SBLC's fidelity bond, except that checks in an
amount of $1,000 or less may be signed by one bonded officer. There
must be two or more bonded officers, or one bonded officer and a bonded
employee to open safe deposit boxes or withdraw securities from
safekeeping. The SBLC shall furnish to each depository bank, custodian,
or entity providing safe deposit boxes a certified copy of the
resolution implementing these control procedures.
(10) Fidelity insurance. It must maintain a Brokers Blanket Bond,
Standard Form 14, or Finance Companies Blanket Bond, Standard Form 15,
or such other form of coverage as SBA may approve, in a minimum amount
of $500,000 executed by a surety holding a certificate of authority
from the Secretary of the Treasury pursuant to 31 U.S.C. 9304-9308.
(11) Common control. It must not control, be controlled by, or be
under common control with, another SBLC. Without prior written SBA
approval, an
[[Page 3250]]
Associate of one SBLC shall not be an Associate of another SBLC or of
any entity which directly or indirectly controls or is under common
control with another SBLC.
(12) Management. An SBLC must employ full time professional
management.
(13) Borrowed funds. Without SBA's prior written approval, it must
not be capitalized with borrowed funds. Shareholders owning 10 percent
or more of any class of its stock shall not use borrowed funds to
purchase the stock unless the net worth of the shareholders is at least
twice the amount borrowed or unless the shareholders receive SBA's
prior written approval for a lower ratio.
Sec. 120.471 Records.
Each SBLC must comply with the following requirements concerning
records:
(a) Maintenance of Records. It must maintain accurate and current
financial records, including books of account, minutes of stockholder,
directors, and executive committee meetings, and all documents and
supporting materials relating to the SBLC's transactions at its
principal business office. Securities held by a custodian pursuant to a
written agreement shall be exempt from this requirement.
(b) Preservation of records. (1) It must preserve in a manner
permitting immediate retrieval the following documentation for the
financial statements required by Sec. 120.472 (and of the accompanying
certified public accountant's opinion), for the following specified
periods:
(i) Preserve permanently:
(A) All general and subsidiary ledgers (or other records)
reflecting asset, liability, capital stock and surplus, income, and
expense accounts;
(B) All general and special journals (or other records forming the
basis for entries in such ledgers); and
(C) The corporate charter, bylaws, application for determination of
eligibility to participate with SBA, and all minutes books, capital
stock certificates or stubs, stock ledgers, and stock transfer
registers;
(ii) Preserve for at least 6 years following final disposition of
the related loan:
(A) All applications for financing;
(B) Lending, participation, and escrow agreements;
(C) Financing instruments; and
(D) All other documents and supporting material relating to such
loans, including correspondence.
(2) Records and other documents referred to in this section may be
preserved electronically if the original is available for retrieval
within a reasonable period.
Sec. 120.472 Reports to SBA.
An SBLC must submit the following to the AA/FA:
(a) An audited financial statement prepared by a certified public
accountant within three months after the close of each fiscal year, and
interim financial reports when requested by SBA;
(b) A report of any legal or administrative proceeding, by or
against the SBLC, or against an officer, director, or employee of the
SBLC for an alleged breach of official duty, within 10 days after
initiating or learning of the proceeding, as well as notification of
the terms of any settlement or final judgment (in addition to any
reporting under applicable SBA Forms);
(c) Copies of any report furnished to its stockholders (including
any prospectus, letter, or other publication concerning the financial
operations of the SBLC);
(d) A summary of any changes in the SBLC's organization or
financing, such as:
(1) Any change in its name, address or telephone number;
(2) Any change in its charter, bylaws, or its officers or directors
(to be accompanied by a statement of personal history on an approved
SBA form);
(3) Any changes in capitalization (including those identified in
Sec. 120.470);
(4) Any changes affecting the eligibility of the SBLC to continue
to participate as an SBLC; and
(5) Notice of a pledge of stock within 30 calendar days of the
transaction if 10 percent or more of the stock is pledged by any person
(or group of persons acting in concert) as collateral for indebtedness,
and such pledge does not involve a transfer for which prior written
approval of SBA is required under Sec. 120.473;
(e) Such other reports as SBA may require from time to time by
written directive.
Sec. 120.473 Change of ownership or control.
(a) Any change of ownership or control without prior written
approval of SBA is prohibited. An SBLC must request approval of any
such change from the AA/FA. Pending the approval, the SBLC may not
register the proposed new owners on its transfer books nor permit them
to participate in any manner in the conduct of the SBLC's affairs.
Change of ownership or control includes:
(1) Any transfer of 10 percent or more of any class of the SBLC's
stock, and any agreement providing for such transfer;
(2) Any transfer that could result in the beneficial ownership by
any person or group of persons acting in concert of 10 percent or more
of any class of its stock, and any agreement providing for such
transfer;
(3) Any merger, consolidation, or reorganization; or
(4) Any other transaction or agreement that transfers control of
the SBLC.
(b) If transfer of ownership or control is subject to the approval
of any State or Federal chartering, licensing, or other regulatory
authority, copies of any documents filed with such authority must, at
the same time, be transmitted to the AA/FA.
Sec. 120.474 Prohibited financing.
An SBLC may not make a loan to a small business that has received
financing (or a commitment for financing) from an SBIC that is an
Associate of the SBLC.
Sec. 120.475 Audits.
Every SBLC is subject to periodic audits by SBA's Office of
Inspector General, Auditing Division, and the cost of such audits will
be assessed against the SBLC, except for the first audit. Fees are
structured based on the SBLC's assets as of the date of the latest
audited financial statement submitted to SBA before the audit. The fee
schedule is set forth in SBA's Standard Operating Procedures manual.
Sec. 120.476 Suspension or revocation.
SBA may revoke or suspend an SBLC for a violation of law, these
regulations, or any agreement with SBA. An appeal can be made following
the procedures set forth in part 134 of this chapter.
Subpart E--Loan Administration
Sec. 120.500 General.
This subpart outlines the general loan administration policies
applicable to loan servicing and liquidation.
Servicing
Sec. 120.510 Servicing direct and immediate participation loans.
SBA services the direct loans that it makes. Generally, the Lender
services immediate participation loans that it makes and in which SBA
participates.
Sec. 120.511 Servicing guaranteed loans.
The Lender services guaranteed loans, holds the Loan Instruments
and receives the Borrower's payments of principal and interest.
[[Page 3251]]
Sec. 120.512 Who services the loan after SBA honors its guarantee?
Generally, after SBA honors its guarantee, the Lender must continue
to hold the Loan Instruments and service and liquidate the loan. The
Lender must execute a Certificate of Interest showing SBA's percentage
of the loan, and must submit a liquidation plan to SBA for each loan to
be liquidated. If SBA elects to service or liquidate the loan, the
Lender must assign the Loan Instruments to SBA.
Sec. 120.513 What servicing actions require the prior written consent
of SBA?
Except as otherwise provided in a Supplemental Guarantee Agreement
with the Lender, SBA must give its prior written consent before the
Lender takes any of the following actions:
(a) Alters substantially the terms or conditions of any Loan
Instrument (for example, any increase in the principal amount or change
in the interest rate, or action conferring a Preference on the Lender);
(b) Releases collateral having a cumulative value in excess of 20
percent of the original loan amount;
(c) Accelerates the maturity of the note;
(d) Sues upon any Loan Instrument;
(e) Compromises or waives any claim against any Borrower,
guarantor, obligor or standby creditor arising out of any Loan
Instrument; or
(f) Increases the amount of any prior lien held by the Lender on
the collateral securing the loan.
SBA'S Purchase of a Guaranteed Portion
Sec. 120.520 When does SBA honor its guarantee?
(a) SBA, in its sole discretion, may purchase a guaranteed portion
of a loan at any time. A Lender may demand in writing that SBA honor
its guarantee if the Borrower is in default on any installment for more
than 60 calendar days (or less if SBA agrees) and the default has not
been cured. If a Borrower cures a default before a Lender requests
purchase by SBA, the Lender's right to request purchase on that default
lapses.
(b) Purchase by SBA of the guaranteed portion does not waive any of
SBA's rights to recover money paid on the guarantee, based upon the
Lender's negligence, misconduct, or violation of this part, including
those actions listed in Sec. 120.524(a), the Loan Guarantee Agreement
or the Loan Instruments.
Sec. 120.521 What interest rate applies after SBA purchases its
guaranteed portion?
When SBA purchases the guaranteed portion of a fixed interest rate
loan, the rate of interest remains as stated in the note. On loans with
a fluctuating interest rate, the interest rate that the Borrower owes
will be at the rate in effect at the time of the earliest uncured
payment default, or the rate in effect at the time of purchase (where
no default has occurred).
Sec. 120.522 How much accrued interest does SBA pay to the Lender or
Registered Holder when SBA purchases the guaranteed portion?
(a) Rate of interest. If SBA purchases the guaranteed portion from
a Lender or from a Registered Holder (if sold in the Secondary Market),
it will pay accrued interest at:
(1) The rate in the note if it is a fixed rate loan; or
(2) The rate in effect on the date of the earliest uncured payment
default, or of SBA's purchase (if there has been no default).
(b) Payment to Lender. If the Lender submits a complete purchase
request to SBA within 120 days of the earliest uncured payment default,
SBA will pay accrued interest to the Lender from the last interest
paid-to-date up to the date of payment. If the Lender requests SBA to
purchase after 120 days from the date of the earliest uncured payment
default date, SBA will pay only 120 days of interest. For LowDoc loans,
the interest paid to the Lender will be governed by the Supplemental
Guarantee Agreement.
(c) Payment to Registered Holder. SBA will pay a Registered Holder
all accrued interest up to the date of payment.
(d) Extension of the 120 day period. Before the 120 days expire,
the SBA field office may extend the period if the Lender and SBA agree
that the Borrower can cure the default within a reasonable and definite
period of time or that the benefits from doing so otherwise will exceed
the costs of SBA paying additional interest. If the 120 days have
passed, only the AA/FA or designee can extend the period.
Sec. 120.523 What is the ``earliest uncured payment default''?
The earliest uncured payment default is the date of the earliest
failure by a Borrower to pay a regular installment of principal and/or
interest when due. Payments made by the Borrower before a Lender makes
its request to SBA to purchase are applied to the earliest uncured
payment default. If the installment is paid in full, the earliest
uncured payment default date will advance to the next unpaid
installment date. If a Borrower makes any payment after the Lender
makes its request to SBA to purchase, the earliest uncured payment
default date does not change because the Lender has already exercised
its right to request purchase.
Sec. 120.524 When is SBA released from liability on its guarantee?
(a) SBA is released from liability on a loan guarantee (in whole or
in part, within SBA's exclusive discretion), if any of the events below
occur:
(1) The Lender has failed to comply materially with any of the
provisions of these regulations, the Loan Guarantee Agreement, or the
Authorization;
(2) The Lender has failed to make, close, service, or liquidate a
loan in a prudent manner;
(3) The Lender's improper action or inaction has placed SBA at
risk;
(4) The Lender has failed to disclose a material fact to SBA
regarding a guaranteed loan in a timely manner;
(5) The Lender has misrepresented a material fact to SBA regarding
a guaranteed loan;
(6) SBA has received a written request from the Lender to terminate
the guarantee;
(7) The Lender has not paid the guarantee fee within the period
required under SBA rules and regulations;
(8) The Lender has failed to request that SBA purchase a guarantee
within 120 days after maturity of the loan;
(9) The Lender has failed to use required SBA forms or exact
electronic copies; or
(10) The Borrower has paid the loan in full.
(b) If SBA determines, after purchasing its guaranteed portion of a
loan, that any of the events set forth in paragraph (a) of this section
occurred in connection with that loan, SBA is entitled to recover any
money paid on the guarantee plus interest from the Lender responsible
for those events.
(c) If the Lender's loan documentation indicates that one or more
of the events in paragraph (a) of this section may have occurred, SBA
may undertake such investigation as it deems necessary to determine
whether to honor or deny the guarantee, and may withhold a decision on
whether to honor the guarantee until the completion of such
investigation.
(d) Any information provided to SBA prior to Lender's request for
SBA to honor its guarantee shall not prejudice SBA's right to deny
liability for a guarantee if one or more of the events listed in
paragraph (a) of this section occur.
(e) Unless SBA provides written notice to the contrary, the Lender
remains responsible for all loan servicing ad liquidation actions until
SBA honors its guarantee in full.
[[Page 3252]]
Deferment, Extension of Maturity and Loan Moratorium
Sec. 120.530 Deferment of payment.
SBA may agree to defer payments on a business loan for a stated
period of time, and use such other methods as it considers necessary
and appropriate to help in the successful operation of the Borrower.
This policy applies to all business loan programs, including 504 loans.
Sec. 120.531 Extension of maturity.
SBA may agree to extend the maturity of a loan for up to 10 years
beyond its original maturity if the extension will aid in the orderly
repayment of the loan.
Sec. 120.532 What is a loan Moratorium?
SBA may assume a Borrower's obligation to repay principal and
interest on a loan by agreeing to make the payments to the Lender on
behalf of the Borrower under terms and conditions set by SBA. This
relief is called a ``Moratorium.'' Complete information concerning this
program may be obtained from local SBA offices.
Liquidation of Collateral
Sec. 120.540 What are SBA's policies concerning liquidation of
collateral?
(a) Liquidation policy. SBA or the Lender may liquidate collateral
securing a loan if the loan is in default or there is no reasonable
prospect that the loan can be repaid within a reasonable period.
(b) Sale and conversion of loans. Without the consent of the
Borrower, SBA may:
(1) Sell a direct loan;
(2) Convert a guaranteed or immediate participation loan to a
direct loan; or
(3) Convert an immediate participation loan to a guaranteed loan or
a loan owned solely by the Lender.
(c) Disposal of collateral and assets acquired through foreclosure
or conveyance. SBA or the Lender may sell real and personal property
(including contracts and claims) pledged to secure a loan that is in
default in accordance with the provisions of the related security
instrument (see Sec. 120.550 for Homestead Protection for Farmers).
(1) Competitive bids or negotiated sales. Generally, SBA will offer
loan collateral and acquired assets for public sale through competitive
bids at auctions or sealed bid sales. The Lender may use negotiated
sales if consistent with its usual practice for similar non-SBA assets.
(2) Lease of acquired property. Normally, neither SBA nor a Lender
will rent or lease acquired property or grant options to purchase. SBA
and the Lender will consider proposals for a lease if it appears a
property cannot be sold advantageously and the lease may be terminated
on reasonable notice upon receipt of a favorable purchase offer.
(d) Recoveries and security interests shared. SBA and the Lender
will share pro rata (in accordance with their respective interests in a
loan) all loan payments or recoveries, all reasonable expenses
(including advances for the care, preservation, and maintenance of
collateral securing the loan and the payment of senior lienholders),
and any security interest or guarantee (excluding SBA's guarantee)
which the Lender or SBA may hold or receive in connection with a loan.
(e) Guarantors. Guarantors of financial assistance have no rights
of contribution against SBA on an SBA guaranteed or direct loan. SBA is
not deemed to be a co-guarantor with any other guarantors.
Homestead Protection for Farmers
Sec. 120.550 What is homestead protection for farmers?
SBA may lease to a farmer-Borrower the farm residence occupied by
the Borrower and a reasonable amount of adjoining property (no more
than 10 acres and seven farm buildings), if they were acquired by SBA
as a result of a defaulted farm loan made or guaranteed by SBA (see the
Consolidated Farm and Rural Development Act, 7 U.S.C. 1921, for
qualifying loan purposes).
Sec. 120.551 Who is eligible for homestead protection?
SBA must notify the Borrower in possession of the availability of
these homestead protection rights within 30 days after SBA acquires the
property. A farmer-Borrower must:
(a) Apply for the homestead occupancy to the SBA field office which
serviced the loan within 90 days after SBA acquires the property;
(b) Provide evidence that the farm produces farm income reasonable
for the area and economic conditions;
(c) Show that at least 60 percent of the Borrower and spouse's
gross annual income came from farm or ranch operations in at least any
two out of the last six calendar years;
(d) Have resided on the property during the previous six years; and
(e) Be personally liable for the debt.
Sec. 120.552 Lease.
If approved, the applicant must personally occupy the residence
during the term of the lease and pay a reasonable rent to SBA. The
lease will be for a period of at least 3 years, but no more than 5
years. A lease of less than 5 years may be renewed, but not beyond 5
years from the original lease date. During or at the end of the lease
period, the lessee has a right of first refusal to reacquire the
homestead property under terms and conditions no less favorable than
those offered to any other purchaser.
Sec. 120.553 Appeal.
If the application is denied, the Borrower may appeal the decision
to the AA/FA. Until the conclusion of any appeal, the Borrower may
retain possession of the homestead property.
Sec. 120.554 Conflict of laws.
In the event of a conflict between the homestead provisions at
Secs. 120.550 through 120.553 of this part, and any state law relating
to the right of a Borrower to designate for separate sale or to redeem
part or all of the real property securing a loan foreclosed by the
Lender, state law shall prevail.
Subpart F--Secondary Market
Fiscal and Transfer Agent (FTA)
Sec. 120.600 Definitions.
(a) Certificate is the document the FTA issues representing a
beneficial fractional interest in a Pool (Pool Certificate), or an
undivided interest in the entire guaranteed portion of an individual
7(a) guaranteed loan (Individual Certificate).
(b) Current means that no repayment from a Borrower to a Lender is
over 29 days late measured from the due date of the payment on the
records of the FTA's central registry (Pools) or the entity servicing
the loan (individual guaranteed portion).
(c) FTA is the SBA's fiscal and transfer agent.
(d) Note Rate is the interest rate on the Borrower's note.
(e) Net Rate is the interest rate on an individual guaranteed
portion of a loan in a Pool.
(f) Pool is an aggregation of SBA guaranteed portions of loans made
by Lenders.
(g) Pool Assembler is a financial institution that:
(1) Organizes and packages a Pool by acquiring the SBA guaranteed
portions of loans from Lenders;
(2) Resells fractional interests in the Pool to Registered Holders;
and
(3) Directs the FTA to issue Certificates.
(h) Pool Rate is the interest rate on a Pool Certificate.
(i) Registered Holder is the Certificate owner listed in FTA's
records.
(j) SBA's Secondary Market Program Guide is an issuance from SBA
which
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describes the characteristics of Secondary Market transactions.
Sec. 120.601 SBA Secondary Market.
The SBA secondary market (``Secondary Market'') consists of the
sale of Certificates, representing either the entire guaranteed portion
of an individual 7(a) guaranteed loan or an undivided interest in a
Pool consisting of the SBA guaranteed portions of a number of 7(a)
guaranteed loans. By the terms of such Certificate, SBA guarantees a
Registered Holder timely payment of principal and interest from the
loan or loans underlying the Certificate. Transactions involving
interests in Pools or the sale of individual guaranteed portions of
loans are governed by the contracts entered into by the parties, SBA's
Secondary Market Program Guide, and this subpart. See sections 5 (f),
(g), and (h) of the Small Business Act (15 U.S.C. 634 (f), (g) and
(h)).
Certificates
Sec. 120.610 Form and terms of Certificates.
(a) General form and content. Each Certificate must be registered
with the FTA. SBA must approve the terms of the Certificate.
(b) Face amount of Pool Certificate. The face amount of a Pool
Certificate cannot be less than a minimum amount as specified in the
Program Guide, and the dollar amount of Certificates must be in
increments which SBA will specify in the Program Guide (except for one
Certificate in each Pool). SBA may change these requirements based upon
an analysis of market conditions and program experience, and will
publish any such change in the Federal Register.
(c) Basis of payment for Pool Certificates. Principal installments
and interest payments are based on the unpaid principal balance of the
portion of the Pool represented by a Pool Certificate. All prepayments
on loans in the Pool must be passed through to the appropriate
Registered Holders with the regularly scheduled payments to such
Holders.
(d) Basis of payment for Individual Certificates. Principal
installments and interest payments are based on the unpaid principal
balance of the SBA guaranteed portion of the loan supporting an
Individual Certificate. The Certificate must provide for a pass through
to the Registered Holder of payments which the FTA receives from a
Lender or any entity servicing the loan, less applicable fees.
(e) Interest rate on Pool Certificate. The interest rate on a Pool
Certificate must be equal to the lowest Net Rate on any individual
guaranteed portion of a loan in the Pool.
Sec. 120.611 Pools backing Pool Certificates.
(a) Pool characteristics. As set forth in the Program Guide, each
Pool must have:
(1) A minimum number of guaranteed portions of loans;
(2) A minimum aggregate principal balance of the guaranteed
portions;
(3) A maximum percentage of the Pool which an individual guaranteed
portion may constitute;
(4) A maximum allowable difference between the highest and lowest
note interest rates;
(5) A maximum allowable difference between the remaining terms to
maturity of the loans in the Pool; and
(6) A minimum weighted average maturity at Pool formation.
(b) Adjustment of Pool characteristics. SBA may adjust the Pool
characteristics periodically based upon program experience and market
conditions.
Sec. 120.612 Loans eligible to back Certificates.
(a) Pool Certificates are backed by the SBA guaranteed portions of
loans comprising the Pool. An Individual Certificate is backed by the
SBA guaranteed portion of a single loan. Any such loan must:
(1) Be current as of the date the Pool is formed or the individual
guaranteed portion of a loan is initially sold in the Secondary Market;
(2) Be guaranteed under the Act; and
(3) Meet such other standards as SBA may determine to be necessary
for the successful operation of the Secondary Market program.
(b) The loans that back a Pool must meet the SBA requirements in
effect at the time the Pool is formed.
Sec. 120.613 Secondary Participation Guarantee Agreement.
When a Lender wants to sell the guaranteed portion of a loan, it
enters into a Secondary Participation Guarantee Agreement (``SPGA'')
with SBA and the prospective purchaser. The terms of sale between the
Lender and the purchaser cannot require the Lender or SBA to repurchase
the guaranteed portion of the loan except in accordance with the terms
of the SPGA. Before execution of the SPGA, the Lender must:
(a) Submit to FTA a copy of the proposed SPGA, the note, and such
other documents as SBA may require;
(b) Disburse to the Borrower the full amount of the loan; and
(c) Pay SBA all guarantee fees relevant to the loan in full.
The SBA Guarantee of a Certificate
Sec. 120.620 SBA guarantee of a Pool Certificate.
(a) Extent of Guarantee. SBA guarantees to a Registered Holder the
timely payment of principal and interest installments and any
prepayment or other recovery of principal to which the Registered
Holder is entitled. If the Borrower of a loan in a Pool backing the
Certificates does not make a required installment payment, SBA, through
the FTA, will make advances to maintain the schedule of interest and
principal payments to the Registered Holders.
(b) SBA guarantee backed by full faith and credit. SBA's guarantee
of the Pool Certificate is backed by the full faith and credit of the
United States.
Sec. 120.621 SBA guarantee of an Individual Certificate.
(a) Extent of SBA guarantee. With respect to Individual
Certificates, SBA guarantees to purchase from the Registered Holder the
guaranteed portion of the loan for an amount equal to the unpaid
principal and accrued interest due as of the date of SBA's purchase,
less deductions for applicable fees. Unlike the SBA guarantee with
respect to pooled loans, SBA does not guarantee timely payment on
Individual Certificates.
(b) What triggers the SBA guarantee. SBA's guarantee to the
Registered Holder may be called upon when:
(1) The Borrower remains in uncured default for 60 days on payments
of principal or interest due on the note;
(2) The Lender fails to send to the FTA on a timely basis payments
it received from the Borrower; or
(3) The FTA fails to send to the Registered Holder on a timely
basis any payments it has received from the Lender.
(c) Full faith and credit. SBA's guarantee to the Registered Holder
is backed by the full faith and credit of the United States.
Pool Assemblers
Sec. 120.630 Qualifications to be a Pool Assembler.
(a) Application to become Pool Assembler. The application to become
a Pool Assembler is available from the AA/FA. In order to qualify as a
Pool Assembler, an entity must send the application to the AA/FA, with
an application fee, and certify that it:
(1) Is regulated by the appropriate agency as defined in section
3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(34)(G));
(2) Meets all financial and other applicable requirements of its
regulatory
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authority and the Government Securities Act of 1986, as amended (Pub.
L. 99-571, 100 Stat. 3208);
(3) Has the financial capability to assemble acceptable and
eligible guaranteed loan portions in sufficient quantity to support the
issuance of Pool Certificates; and
(4) Is in good standing with SBA (as the AA/FA determines), the
Office of the Comptroller of the Currency (``OCC'') if it is a national
bank, the Federal Deposit Insurance Corporation if it is a bank not
regulated by the OCC, or the National Association of Securities Dealers
if it is a member.
(b) Approval by SBA. An entity may not submit Pool applications to
the FTA until SBA has approved the application to become a Pool
Assembler.
(c) Conduct of business by Pool Assembler. An entity continues to
qualify as a Pool Assembler so long as it:
(1) Meets the eligibility standards in paragraph (a) of this
section;
(2) Conducts its business in accordance with SBA regulations and
accepted securities or banking industry practices, ethics, and
standards; and
(3) Maintains its books and records in accordance with generally
accepted accounting principles or in accordance with the guidelines of
the regulatory body governing its activities.
Sec. 120.631 Suspension or termination of Pool Assembler.
(a) Suspension or termination. The AA/FA may suspend a Pool
Assembler from operating in the Secondary Market for up to 18 months or
terminate its status as a Pool Assembler, if the Pool Assembler (and/or
its Associates):
(1) Does not comply with any of the requirements in Sec. 120.630
(a) and (c);
(2) Has been indicted or otherwise formally charged with, or
convicted of, a misdemeanor or felony;
(3) Has received an adverse civil judgment that it has committed a
breach of trust or a violation of a law or regulation protecting the
integrity of business transactions or relationships;
(4) Has not formed a Pool for at least three years; or
(5) Is under investigation by its regulating authority for
activities which may affect its fitness to participate in the Secondary
Market.
(b) Suspension procedures. The AA/FA shall notify a Pool Assembler
by certified mail, return receipt requested, of the decision to suspend
and the reasons therefore at least 10 business days prior to the
effective date of the suspension. The Pool Assembler may appeal the
suspension made under this section pursuant to the procedures set forth
in part 134 of this chapter. The action of the AA/FA shall remain in
effect pending resolution of the appeal.
(c) Notice of termination. In order to terminate a Pool Assembler,
the AA/FA must issue an order to show cause why the SBA should not
terminate the Pool Assembler's participation in the Secondary Market.
The Pool Assembler may appeal the termination made under this section
pursuant to procedures set forth in part 134 of this chapter. The
action of the AA/FA shall remain in effect pending resolution of the
appeal.
Miscellaneous Provisions
Sec. 120.640 Administration of the Pool and Individual Certificates.
(a) FTA responsibility. The FTA has the responsibility to
administer each Pool or Individual Certificate. It shall maintain a
registry of Registered Holders and other information as SBA requires.
(b) Self-liquidating. Each Pool or individual guaranteed portion of
a loan in the Secondary Market is self-liquidating because of Borrower
payments or prepayments, redemption by SBA, and/or payments by SBA or
the Lender after default by the Borrower. Substitution of the
guaranteed portions of existing loans for defaulted loans is not
permitted.
(c) SBA's right to subrogation. If SBA pays a claim under a
guarantee with respect to a Certificate issued under this subpart, it
must be subrogated fully to the rights satisfied by such payment.
(d) SBA ownership rights not limited. No Federal, State or local
law can preclude or limit the exercise by SBA of its ownership rights
in the portions of loans constituting the Pool against which the
Certificates are issued.
Sec. 120.641 Disclosure to purchasers.
(a) Information to purchaser. Prior to any sale, the Pool
Assembler, Registered Holder of an Individual Certificate, or any
subsequent seller must disclose to the purchaser, verbally or in
writing, information on the terms, conditions, and yield as described
in the SBA Secondary Market Program Guide.
(b) Information on transfer document. The seller must provide the
same information described in paragraph (a) of this section in writing
on the transfer document when the seller submits it to the FTA. After
the sale of an Individual Certificate, the FTA will provide the
disclosure information in writing to the purchaser.
(c) Information in prospectus. If the Registered Holder is a trust,
investment Pool, mutual fund or other security, it must disclose the
information in paragraph (a) of this section to investors through a
prospectus and other promotional material if an Individual Certificate
or Pool Certificate is placed into or used as the backing for the
investment vehicle.
Sec. 120.642 Requirements before the FTA issues Pool Certificates.
Before the FTA issues any Pool Certificate, the Pool Assembler must
deliver to it the following documents:
(a) A properly completed Pool application form;
(b) Either:
(1) Individual Certificates evidencing the guaranteed portions
comprising the Pool; or
(2) An executed SPGA and related documentation for the loans whose
guaranteed portions are to be part of the Pool; and
(c) Any other documentation which SBA may require.
Sec. 120.643 Requirements before the FTA issues Individual
Certificates.
(a) FTA issuance of initial Certificate. Before the FTA can issue
the Individual Certificate for a guaranteed portion of a loan, the
original seller must provide the following documents to the FTA:
(1) An executed SPGA;
(2) A copy of the note representing the guaranteed loan; and
(3) Any other documentation which SBA may require.
(b) Review of documentation. SBA may review or require the FTA to
review any documentation before the FTA issues a Certificate.
Sec. 120.644 Transfers of Certificates.
(a) General rule. Certificates are transferable. Transfers in the
Secondary Market must comply with Article 8 of the Uniform Commercial
Code of the State of New York. The seller must use the detached form of
assignment (SBA Form 1088), unless the seller and purchaser choose to
use another form which the SBA approves. The FTA may refuse to issue a
Certificate until it is satisfied that the documents of transfer are
complete.
(b) Transfer on FTA records. In order for the transfer of a
Certificate to be effective the FTA must reflect it on its records.
(c) Contents of letter of transmittal accompanying the transfer of
Certificates. (1) A letter of transmittal must accompany each
Certificate which a Registered Holder submits to the FTA for transfer.
The Registered Holder must supply the following information in the
letter:
(i) Pool number, if applicable;
(ii) Certificate number;
(iii) Name of purchaser of Certificate;
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(iv) Address and tax identification number of the purchaser;
(v) Name and telephone number of the person handling or
facilitating the transfer;
(vi) Instructions for the delivery of the new Certificate.
(2) The Registered Holder must also send the fee which the FTA
charges for this service. The FTA will supply fee information to the
Registered Holder.
(d) Lender cannot purchase guaranteed portion of loan it made. The
Lender (or its Associate) that made a 7(a) guaranteed loan cannot
purchase the guaranteed portion of that loan in the Secondary Market.
If a Lender does purchase the guaranteed portion of one of its own
loans, it shall not have the unconditional guarantee of SBA.
Sec. 120.645 Redemption of Certificates.
(a) Redemption of Individual Certificate. The prepayment of the
underlying loan or a default on such loan will trigger the redemption
of the Certificate by FTA/SBA in accordance with the procedures
prescribed in the SPGA.
(b) Redemption of Pool Certificate. The FTA and SBA may redeem a
Pool Certificate because of prepayment or default of all loans in a
Pool.
Sec. 120.650 Registration duties of FTA in Secondary Market.
The FTA registers all Certificates. This means it issues, transfers
title to, and redeems them. All financial transactions relating to a
guaranteed portion of a loan flow through the FTA. In fulfilling its
obligation to keep the central registry current, the FTA may, with
SBA's approval, obtain any necessary information from the parties
involved in the Secondary Market.
Sec. 120.651 Claim to FTA by Registered Holder to replace Certificate.
(a) To replace a Certificate because of loss, theft, destruction,
mutilation, or defacement, the Registered Holder must:
(1) Give the FTA information about the Certificate and the facts
relating to the claim;
(2) File an indemnity bond acceptable to SBA and the FTA with a
surety to protect the interests of SBA and the FTA;
(3) Pay the FTA its fee to replace a Certificate; and
(4) Use an affidavit of loss (form available from the FTA) to
report:
(i) The name and address of the Registered Holder (and the name and
capacity of any representative actually filing the claim);
(ii) The Certificate by Pool number, if applicable;
(iii) The Certificate number;
(iv) The original principal amount;
(v) The name in which the Certificate was registered;
(vi) Any assignment, endorsement or other writing on the
Certificate; and
(vii) A statement of the circumstances of the theft or loss.
(b) When the FTA receives notice of the theft or loss, it will stop
any transfer of the Certificate. The Registered Holder must send to the
FTA all available portions of a mutilated or defaced Certificate. When
the Registered Holder completes these steps, the FTA will replace the
Certificate.
Sec. 120.652 FTA fees.
The FTA may charge reasonable servicing fees, transfer fees, and
other fees as the SBA and FTA may negotiate under contract.
Suspension or Revocation of Participant in Secondary Market
Sec. 120.660 Suspension or revocation.
(a) Suspension or revocation of Lender, broker, dealer, or
Registered Holder for violation of Secondary Market rules and
regulations. The AA/FA may suspend or revoke the privilege of a Lender,
broker, dealer, or Registered Holder to sell, purchase, broker, or deal
in loans or Certificates for:
(1) Committing a serious violation, in SBA's discretion, of:
(i) The regulations governing the Secondary Market; or
(ii) Any provisions in the contracts entered into by the parties,
including SBA Forms 1085, 1086, 1088 and 1454; or
(2) Knowingly submitting false or fraudulent information to the SBA
or FTA.
(b) Additional rules for suspension or revocation of broker or
dealer. In addition to acting under paragraph (a) of this section, the
AA/FA may suspend or revoke the privilege of any broker or dealer to
sell or otherwise deal in Certificates in the Secondary Market if:
(1) Its supervisory agency has revoked or suspended the broker or
dealer from engaging in the securities business, or is investigating
the firm or broker for a practice which SBA considers, in its sole
discretion, to be relevant to the broker's or dealer's fitness to
participate in the Secondary Market;
(2) The broker or dealer has been indicted or otherwise formally
charged with a misdemeanor or felony which bears on its fitness to
participate in the Secondary Market; or
(3) A civil judgment is entered holding that the broker or dealer
has committed a breach of trust or a violation of any law or regulation
protecting the integrity of business transactions or relationships.
(c) Notice to suspend or revoke. The AA/FA shall notify the
affected party in writing, providing the reasons therefore, at least 10
business days prior to the effective date of the suspension or
revocation. The affected party may appeal the suspension or revocation
made under this section pursuant to the procedures set forth in part
134 of this chapter. The action of the AA/FA will remain in effect
pending resolution of the appeal. Revocation will last a minimum of
five years.
Subpart G--Microloan Demonstration Program
Sec. 120.700 What is the Microloan Program?
The Microloan Demonstration Program assists women, low income
individuals, minority entrepreneurs, and other small businesses which
need small amounts of financial assistance. Under this program, SBA
makes direct and guaranteed loans to Intermediaries (as defined below)
who use the proceeds to make loans to eligible borrowers. SBA may also
make grants under the program to Intermediaries and other qualified
nonprofit entities to be used for marketing, management, and technical
assistance to the program's target population.
Sec. 120.701 Definitions.
(a) Deposit account is a demand, time, savings, passbook, or
similar account maintained with an insured depository institution (not
including an account evidenced by a Certificate of Deposit).
(b) Economically Distressed Area is a county or equivalent division
of local government of a state in which, according to the most recent
available data from the United States Bureau of the Census, 40 percent
or more of the residents have an annual income that is at or below the
poverty level.
(c) Grant is a Federal award of money, or property in lieu of money
(including cooperative agreements) to an eligible grantee that must
account for its use. The term does not include the provision of
technical assistance, revenue sharing, loans, loan guarantees, interest
subsidies, insurance, direct appropriations, or any fellowship or other
lump sum award.
(d) Insured depository institution has the same meaning as in
section 3(c) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
(e) Intermediary is an entity participating in the Microloan
Demonstration Program which makes and services Microloans to eligible
small businesses and which provides
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marketing, management, and technical assistance to its borrowers. It
may be:
(1) A private, nonprofit community development corporation or other
entity;
(2) A consortium of private, nonprofit community development
corporations or other entities;
(3) A quasi-governmental economic development entity, other than a
state, county, municipal government or any agency thereof; or
(4) An agency of or a nonprofit entity established by a Native
American Tribal Government.
(f) Microloan is a short-term, fixed interest rate loan of not more
than $25,000 made by an Intermediary to an eligible small business.
(g) Non-Federal sources are sources of funds other than the Federal
Government and may include indirect costs or in-kind contributions paid
for under non-Federal programs. Community Block Development Grants are
considered non-Federal sources.
(h) Specialized Intermediary is an Intermediary which maintains a
portfolio of Microloans averaging $7,500 or less.
Sec. 120.702 Are there limitations on who can be an Intermediary or on
where an Intermediary may operate?
(a) Prior experience requirement. To be eligible to be an
Intermediary, an organization must:
(1) Have made and serviced short-term fixed rate loans of not more
than $25,000 to newly established or growing small businesses for at
least one year; and
(2) Have at least one year of experience providing technical
assistance to its borrowers.
(b) Limitation to one state. An Intermediary may not operate in
more than one state unless the AA/FA determines that it would be in the
best interests of the small business community for it to operate across
state lines.
Sec. 120.703 How does an organization apply to become an Intermediary?
(a) Application Process. Organizations interested in becoming
Intermediaries should contact SBA for information on the application
process.
(b) Documentation in support of application. The application must
include a detailed narrative statement describing:
(1) The types of businesses assisted in the past and those the
applicant intends to assist with Microloans;
(2) The average size of the loans made in the past and the average
size of intended Microloans;
(3) The extent to which the applicant will make Microloans to small
businesses in rural areas;
(4) The geographic area in which the applicant intends to operate,
including a description of the economic and demographic conditions
existing in the intended area of operations;
(5) The availability and cost of obtaining credit for small
businesses in the area;
(6) The applicant's experience and qualifications in providing
marketing, management, and technical assistance to small businesses;
and
(7) Any plan to use other technical assistance resources (such as
counselors from the Service Corps of Retired Executives) to help
Microloan borrowers.
Sec. 120.704 How are applications evaluated?
(a) Evaluation criteria. In selecting Intermediaries, SBA will
attempt to insure that Microloans are available to small businesses in
all industries and particularly to small businesses located in urban
and rural areas.
(b) Preference for organizations which make very small loans. In
selecting Intermediaries, SBA will give priority to applicants which
maintain a portfolio of loans averaging $7,500 or less.
(c) Consideration of quasi-governmental organizations. Generally,
SBA will consider applications by quasi-governmental organizations only
when it determines that program services for a particular geographic
area would be best provided by such organization.
Sec. 120.705 What is a Specialized Intermediary?
At the end of an Intermediary's first year of participation in the
program, SBA will determine whether it qualifies as a Specialized
Intermediary. An Intermediary qualifies as a Specialized Intermediary
if it maintains a portfolio of Microloans averaging $7,500 or less.
Specialized Intermediaries qualify for more favorable interest rates on
SBA loans. If, after the first year, an Intermediary qualifies as a
Specialized Intermediary, the special interest rate is applied
retroactively to SBA loans made to the Intermediary. After the first
year SBA will determine an Intermediary's qualifications as a
Specialized Intermediary annually, based on its lending practices
during the term of its participation in the program. Specialized
Intermediaries also qualify for a greater amount of technical
assistance grant funding.
Sec. 120.706 What are the terms and conditions of an Intermediary SBA
loan?
(a) Loan Amount. An Intermediary may not borrow more than $750,000
in the first year of participation in the program. In subsequent years,
the Intermediary's obligations to SBA may not exceed an aggregate of
$2.5 million, subject to statutory limitations on the total amount of
funds available per state.
(b) Repayment terms. During the first year of the loan, an
Intermediary is not required to make any payments, but interest accrues
from the date that SBA disburses the loan proceeds to the Intermediary.
After that, SBA will determine the periodic payments. The loan must be
repaid within 10 years.
(c) Interest rate. The interest rate is equal to the rate
applicable to five-year obligations of the United States Treasury,
adjusted to the nearest one-eighth percent, less 1.25 percent. However,
the interest rate for Specialized Intermediaries is equal to the rate
applicable to five-year obligations of the United States Treasury,
adjusted to the nearest one-eighth percent, less two percent.
(d) Collateral. As security for repayment of the SBA loan, an
Intermediary must pledge to SBA a first lien position in the MRF
(described below), LLRF (described below), and all notes receivable
from Microloans.
(e) Default. If for any reason an Intermediary is unable to make
payment to SBA when due, SBA may accelerate maturity of the loan and
demand payment in full. In this event, or if an Intermediary violates
this part or the terms of its loan agreement, it must surrender
possession of all collateral described in paragraph (d) of this section
to SBA. The Intermediary is not obligated to pay SBA any loss or
deficiency which may remain after liquidation of the collateral unless
the loss was caused by fraud, negligence, violation of any of the
ethical requirements of Sec. 120.140, or violation of any other
provision of this part.
(f) Fees. SBA does not charge Intermediaries any fees for loans
under this Program. An Intermediary may, however, pay minimal closing
costs to third parties, such as filing and recording fees.
Sec. 120.707 What conditions apply to loans by Intermediaries to
Microloan Borrowers?
(a) General. An Intermediary may make Microloans to any small
business eligible to receive financial assistance under this part.
Proceeds from Microloans may be used only for working capital and
acquisition of materials, supplies, furniture, fixtures,
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and equipment. SBA does not review Microloans for creditworthiness.
(b) Amount and maturity. Generally, Intermediaries should not make
a Microloan of more than $10,000 to any borrower. An Intermediary may
not make a Microloan of more than $15,000 unless the borrower
demonstrates that it is unable to obtain credit elsewhere at comparable
interest rates and that it has good prospects for success. An
Intermediary may not make a loan of more than $25,000, and no borrower
may owe an Intermediary more than $25,000 at any one time. Each
Microloan must be repaid within six years.
(c) Interest rate. The maximum interest rate that can be charged a
Microloan borrower is:
(1) On loans of more than $7,500, the interest rate charged on the
SBA loan to the Intermediary, plus 7.75 percentage points; and
(2) On loans of $7,500 or less, the interest rate charged on the
SBA loan to the Intermediary, plus 8.5 percentage points.
Sec. 120.708 What is the Intermediary's financial contribution?
The Intermediary must contribute from non-Federal sources an amount
equal to 15 percent of any loan that it receives from SBA. The
contribution may not be borrowed. For purposes of this program,
Community Development Block Grants are considered non-Federal sources.
Sec. 120.709 What is the Microloan Revolving Fund?
The Microloan Revolving Fund (``MRF'') is an interest-bearing
Deposit Account into which an Intermediary must deposit the proceeds
from SBA loans, its contributions from non-Federal sources, and
payments from its Microloan borrowers. An Intermediary may only
withdraw from this account the money needed to establish the Loan Loss
Reserve Fund (Sec. 120.710), proceeds for each Microloan it makes, and
any payments to be made to SBA.
Sec. 120.710 What is the Loan Loss Reserve Fund?
(a) General. The Loan Loss Reserve Fund (``LLRF'') is an interest-
bearing Deposit Account which an Intermediary must establish to pay any
shortage in the MRF caused by delinquencies or losses on Microloans. An
Intermediary must maintain the LLRF until it has repaid all obligations
it owes SBA.
(b) Level of Loan Loss Reserve Fund in first year. In an
Intermediary's first year, the balance on deposit in the LLRF must
equal not less than 15 percent of the total outstanding balance of all
notes receivable owed by its Microloan borrowers.
(c) Level of Loan Loss Reserve Fund in subsequent years. In all
subsequent years, an Intermediary must maintain a balance on deposit in
the LLRF at a level which, at a minimum, reflects its loss experience
as determined by SBA. However, the maximum amount required in the LLRF
will not exceed 15 percent of the total outstanding balance owed by an
Intermediary's Microloan borrowers.
Sec. 120.711 What rules govern Intermediaries?
Intermediaries must operate in accordance with applicable statutes,
regulations, policy notices, SBA's Standard Operating Procedures
(SOPs), and the information in the application.
Sec. 120.712 How does an Intermediary get a grant to assist Microloan
Borrowers?
(a) General. An Intermediary is eligible to receive grant funding
from SBA of not more than 25 percent of the outstanding balance of all
SBA loans to the Intermediary. The Intermediary must contribute, solely
from non-Federal sources, an amount equal to 25 percent of the grant.
Contributions may be made in cash or in kind.
(b) Limitations on grant funds. An Intermediary may not borrow its
contribution. It may only use grant funds to provide Microloan
borrowers with marketing, management, and technical assistance, except
that:
(1) Up to 15 percent of the grant funds may be used to provide
information and technical assistance to prospective Microloan
borrowers; and
(2) Grant monies may be used to attend training required by SBA.
Intermediaries may not enter into third party contracts for the
provision of technical assistance to program clients.
(c) Exception to contribution requirement. Intermediaries which
make at least 50 percent of their loans to small businesses located in
or owned by residents of Economically Distressed Areas are not subject
to the contribution requirement in paragraph (a) of this section.
(d) Intermediaries eligible to receive additional grant monies. An
Intermediary may receive an additional SBA grant equal to five percent
of the outstanding balance of all loans received from SBA (with no
obligation to contribute additional matching funds) if:
(1) The Intermediary makes at least 25 percent of its loans to
small businesses located in or owned by residents of an Economically
Distressed Area; or
(2) The Intermediary is a Specialized Intermediary.
(e) SBA will determine an Intermediary's eligibility for all grants
under this section separately for each loanmaking office or site.
Sec. 120.713 Does SBA provide technical assistance to Intermediaries?
SBA may procure technical assistance for an Intermediary to improve
its knowledge, skill, and understanding of microlending by awarding a
grant to a more experienced Intermediary. SBA may also obtain such
assistance for prospective Intermediaries in areas of the country that
are either not served or underserved by an existing Intermediary.
Sec. 120.714 How does a non-Intermediary get a grant?
(a) Grant procedure for non-Intermediaries. Any nonprofit entity
that is not an Intermediary may apply to SBA for a grant to provide
marketing, management and technical assistance to low-income
individuals for the purpose of assisting them in obtaining private
sector financing in amounts of $25,000 or less. To qualify, it must
submit information regarding its ability to provide this assistance. If
approved, the grant agreement will establish the terms and conditions
for the grant.
(b) Number and amounts of grants. In each year of the Microloan
Program, SBA may make no more than 25 grants to non-Intermediaries for
terms of up to five years. A grant may not exceed $125,000.
(c) Contribution by nonprofit entity. The nonprofit entity must
contribute an amount equal to 20 percent of the grant. The contribution
from the nonprofit entity must come solely from non-Federal sources,
and may include direct costs or in-kind contributions paid for under
non-Federal programs.
Sec. 120.715 Does SBA guarantee any loans an Intermediary obtains from
another source?
(a) SBA may guarantee not less than 90 percent of no more than 10
loans by for-profit or nonprofit entities (or an alliance of such
entities) to Intermediaries located in urban areas and no more than 10
loans by such entities to Intermediaries located in Rural Areas (as
defined in Sec. 120.10).
(b) Any loan guaranteed by SBA under this section will have a term
of 10 years. If an Intermediary receives such a loan, it will not need
to repay any principal or interest during the first year, although the
interest will accrue. During the second through fifth years, the
Intermediary will pay interest only. During the sixth through tenth
years, it will pay interest and fully amortize the principal.
[[Page 3258]]
(c) The interest rate on any loan under this section shall be
calculated as described in Sec. 120.706.
Subpart H--Development Company Loan Program (504)
Sec. 120.800 What is the purpose of the 504 program?
As authorized by Congress, SBA has established this program to
foster economic development, create or preserve job opportunities, and
stimulate growth, expansion, and modernization of small businesses.
Sec. 120.801 How is a 504 Project financed?
(a) A small business may apply for 504 financing through the CDC
serving the area in which the 504 Project is located. SBA issues an
Authorization if it agrees to guarantee part of the funding for a
Project.
(b) Usually, a Project requires interim financing from an interim
lender (often the same lender that later provides a portion of the
permanent financing).
(c) Generally, permanent financing of the Project consists of:
(1) A contribution by the small business in an amount of at least
10 percent of the Project costs;
(2) A loan made with the proceeds of a CDC Debenture for up to 40
percent of the Project costs and certain administrative costs,
collateralized by a second lien on the Project Property; and
(3) A private sector loan comprising the balance of the financing,
collateralized by a first lien on the Project property.
(d) The Debenture is guaranteed 100 percent by SBA (with the full
faith and credit of the United States), and sold to Underwriters who
form Debenture Pools. Investors purchase interests in Debenture Pools
and receive Certificates representing ownership of all or part of a
Debenture Pool. SBA and CDCs use various agents to facilitate the sale
and service of the Certificates and the orderly flow of funds among the
parties.
Sec. 120.802 Definitions.
The following terms have the same meaning wherever they are used in
this subpart. Defined terms are capitalized wherever they appear.
Area of Operations is a geographic area in which a CDC conducts its
activities.
Associate Development Company (ADC) is an entity approved by SBA to
assist CDCs to deliver 504 financing.
Central Servicing Agent (CSA) is an entity that receives and
disburses funds among the various parties involved in 504 financing
under a master servicing agent agreement with SBA.
Certificate is a document issued by SBA or its agent representing
ownership of all or part of a Debenture Pool.
Debenture is an obligation issued by a CDC and guaranteed 100
percent by SBA, the proceeds of which are used to fund a 504 loan.
Debenture Pool is an aggregation of Debentures.
Investor is an owner of a beneficial interest in a Debenture Pool.
Job Opportunity is a full time (or equivalent) permanent job
created within two years of receipt of 504 funds, or retained in the
community because of a 504 loan.
Net Debenture Proceeds are the portion of Debenture proceeds that
finance eligible Project costs (excluding administrative costs).
Project is the purchase or lease, and/or improvement or renovation
of long-term fixed assets by a small business, with 504 financing, for
use in its business operations.
Project Property is one or more long-term fixed assets, such as
land, buildings, machinery, and equipment, acquired or improved by a
small business, with 504 financing, for use in its business operations.
Third Party Loan is a loan from a commercial or private lender,
investor, or Federal (non-SBA), State or local government source as
part of the Project financing.
Underwriter is an entity approved by SBA to form Debenture Pools
and arrange for the sale of Certificates.
Certification Procedures To Become a CDC
Sec. 120.810 Applications for certification as a CDC.
(a) Applicants for certification as a CDC must apply to the SBA
District Office serving a proposed Area of Operations. An applicant
must demonstrate that it satisfies the certification and operating
criteria in Secs. 120.820 through 120.829, as well as:
(1) The need for 504 services (if there is already a CDC in the
Area of Operations, the applicant must justify the need for another and
present a plan to avoid duplication or overlap);
(2) A budget, approved by its Board of Directors; and
(3) A plan to meet CDC operating requirements (without specializing
in a particular industry).
(b) The AA/FA, with the recommendation of each District Office in
the applicant's proposed Area of Operations, shall make the
certification decision.
Sec. 120.811 Public notice of CDC certification application.
(a) As part of the application process, the applicant must publish
a notice in a general
FR Doc. 96-1432 Business Loan Programs
circulation newspaper in the proposed Area of
Operations, including the name and location of the proposed CDC, its
purpose and Area of Operations, and the names and addresses of its
officers and directors. The applicant shall send a copy of the notice
to SBA. The notice shall provide the public at least 30 days to submit
written comments to the District Office. The SBA shall consider the
comments in making its decision on the application.
(b) CDCs serving the proposed Area of Operations shall be directly
notified and given at least 30 days to comment.
Sec. 120.812 Probationary period for newly certified CDCs.
(a) Newly certified CDCs will be on probation for a period of two
years, at the end of which the CDC must petition for:
(1) Permanent CDC status;
(2) A single, one-year extension of probation; or
(3) ADC status.
(b) SBA will consider failure to file a petition before the end of
the probationary period as a withdrawal from the 504 program. If the
CDC elects ADC status or withdrawal, it must transfer all funded and/or
approved loans to another CDC, SBA, or another servicer approved by
SBA.
Requirements for CDC Certification and Operation
Sec. 120.820 CDC non-profit status.
A CDC must be a non-profit corporation (or limited liability
company) in good standing. (For-profit CDCs certified by SBA prior to
January 1, 1987 may retain their certifications.) An SBIC may not
become a CDC.
Sec. 120.821 CDC Area of Operations.
A CDC must have a designated Area of Operations, specified by the
CDC and approved by SBA. There can be only one statewide CDC in each
state, which must foster economic development throughout the state and
provide 504 assistance to areas not adequately served by other CDCs.
Sec. 120.822 CDC membership.
A CDC must have at least 25 members (or stockholders for for-profit
CDCs approved prior to January 1, 1987). No person or entity may own or
control more than 10 percent of the CDC's voting membership (or stock).
Members must be representative of and provide evidence of active
support in the Area
[[Page 3259]]
of Operations. Members must be from each of the following groups:
(a) Government organizations responsible for economic development
in the Area of Operations and acceptable to SBA;
(b) Financial institutions that provide commercial long-term fixed
asset financing in the Area of Operations;
(c) Community organizations dedicated to economic development in
the Area of Operations such as chambers of commerce, foundations, trade
associations, colleges, or universities; and
(d) Businesses in the Area of Operations.
Sec. 120.823 CDC Board of Directors.
The CDC must have a Board of Directors chosen from the membership
by the members, and representing at least three of the four membership
groups. No single group shall control. The Board members must be
responsible officials of the organizations they represent, and at least
one must possess commercial lending experience. The Board must meet at
least quarterly and shall be responsible for CDC staff decisions and
actions. A quorum shall require at least 5 Directors. If there is a
vote on loan approval or servicing actions, at least one Board member
with commercial loan experience approved by SBA must be present and
vote. As an alternative, the Board may obtain the recommendation of
another person approved by SBA and possessing commercial lending
experience.
Sec. 120.824 Professional management and staff.
A CDC must have full-time professional management, including an
Executive Director (or the equivalent) managing daily operations. It
must also have a full-time professional staff qualified by training and
experience to market the 504 Program, package and process loan
applications, close loans, service the loan portfolio, and sustain a
sufficient level of service and activity in the Area of Operations.
(a) Contracting out to third parties. CDCs may obtain, under
contract, marketing, packaging, processing, and servicing services from
qualified Lender Service Providers, as that term is defined in part 103
of this chapter, located in the Area of Operations, subject to SBA's
prior written approval. CDCs may contract for outside legal and
accounting services without SBA approval. Compensation under all such
contracts must be reasonable and customary for similar services in the
Area of Operations. SBA may audit the contracts.
(b) Contracting out to other CDCs. CDCs may contract with other
CDCs for specific services, subject to SBA's prior written approval.
Sec. 120.825 Financial ability to operate.
A CDC must be able to sustain its operations continuously, with
reliable sources of funds (such as income from services rendered and
contributions from government or other sponsors).
Sec. 120.826 Basic requirements for operating a CDC.
A CDC must operate in accordance with applicable statutes,
regulations, policy notices, SBA's SOPs, and the information in its
application. It must supply to SBA current and accurate information
about all certification and operational requirements, and maintain the
records and submit the reports required by SBA.
Sec. 120.827 Services a CDC provides to small businesses.
(a) A CDC must operate in and adequately service its Area of
Operations. It must market the 504 program, package and process 504
loan applications, and close and service 504 loans. A CDC's loan
portfolio must be diversified by business sector.
(b) A CDC may provide small businesses with financial and technical
assistance, or may help small businesses obtain such assistance from
other sources, including preparing, closing, and servicing loans under
contract with Lenders in SBA's 7(a) program.
(c) A CDC also may loan amounts to the Borrower equal to the value
of all or part of the Borrower's contribution to a Project in the form
of cash or land, including site improvements, previously acquired by
the CDC.
Sec. 120.828 Minimum level of CDC lending activity.
A CDC must provide at least two 504 loan approvals each full fiscal
year.
Sec. 120.829 Job Opportunity average a CDC must maintain.
(a) A CDC's portfolio must reflect an average of one Job
Opportunity per $35,000 of 504 loan funding. The AA/FA may permit a CDC
to average up to one per $45,000 for good cause in:
(1) Alaska;
(2) Hawaii;
(3) State-designated urban or rural jobs and enterprise zones;
(4) Empowerment Zones and Enterprise Communities; and
(5) Labor Surplus Areas listed in the Department of Labor's
publication ``Area Trends.''
(b) A CDC must indicate in its annual report the Job Opportunities
actually or estimated to be provided by each Project.
(c) If a CDC does not maintain the required average, it may retain
its certification if it justifies to SBA's satisfaction its failure to
do so in its annual report and shows how it intends to attain the
required average.
Sec. 120.830 Reports a CDC must submit.
A CDC must submit the following reports to SBA:
(a) An annual report within 90 days after the end of the CDC's
fiscal year, and such interim reports as SBA may require;
(b) Resumes for all new Associates and staff;
(c) Reports of involvement in any legal proceeding;
(d) Changes in organizational status;
(e) Changes in any condition that affects its eligibility to
continue to participate in the 504 program; and
(f) Quarterly service reports on each loan in its portfolio which
is 60 days or more past due (and interim reports upon request by SBA).
Extending a CDC'S Area of Operations
Sec. 120.835 Application to extend an Area of Operations.
SBA may expand a CDC's Area of Operations if the proposed Area of
Operation is not being adequately served by existing CDC(s) and the
expanding CDC is well-qualified to serve it. A CDC seeking to expand
its Area of Operations must apply in writing to the SBA District Office
serving the geographic area in which the CDC proposes to expand.
(a) A CDC may submit an application to expand its Area of
Operations if the existing CDCs serving the area have not averaged,
over the last two years, at least one loan approval per 100,000 of
general population in the Area of Operation. The one loan per 100,000
population requirement applies only to the area proposed for expansion,
not the entire Area of Operations of the existing CDC or CDCs serving
the expanded area.
Example to paragraph (a) of this section. CDC A averages 0.8
loans per 100,000 of general population state-wide, but 1.2 loans
per 100,000 in city X. CDC B seeks to expand its Area of Operations
only into city X. CDC B's application will be denied without further
review because CDC A meets the 1 loan per 100,000 population
requirement in the proposed expanded Area of Operation.
(b) The application to expand must demonstrate to the satisfaction
of SBA the expanding CDC's ability to provide full service to small
businesses in the expanded territory, including processing, closing,
servicing, and, if authorized, liquidating 504 loans. The
[[Page 3260]]
expanding CDC must also demonstrate in its application that it will
have a local presence and representation in the expanded Area of
Operations before submitting any 504 loans for approval.
Sec. 120.836 Public notice and opportunity for response.
SBA will notify all CDCs servicing the proposed area of expansion,
allowing at least 30 days for the existing CDCs to respond to the
District Office. The expanding CDC also must publish a notice in a
general circulation newspaper in the proposed area of expansion,
advising of its intent to expand and giving the public at least 30 days
to comment to SBA. The burden of proof in opposing the application will
be upon the existing CDC or CDCs to show why SBA should not grant the
application for extension.
Sec. 120.837 SBA decision on application for extension.
(a) The SBA District Office may consider any factor presented to it
concerning the proposed area of expansion, the expanding CDC and its
Area of Operations, and the existing CDC or CDCs serving the area,
including the following: number of loan approvals per 100,000 of
general population; number of loan approvals per 100,000 of small
businesses; the density of small businesses; jobs created and retained;
the number of 504 loan closings; the average 504 loan amount; urban,
suburban, or rural character of the expanding area; the mix of small
businesses; the prevailing economic conditions; servicing record and
capabilities; currency rates; loss rates; other services provided to
small businesses (technical and financial assistance); relationship
with the local SBA office; and ties to and knowledge of the local
community and its resources.
(b) The SBA District Office will submit a recommendation, with any
supporting materials, within 30 days of the end of the comment period
to the AA/FA, who will make the final decision within 30 days of his or
her receipt of the District Office's recommendation. In making its
decision, SBA will consider all information submitted to it, as well as
the currency of the expanding CDC's portfolio, including the default
rate.
Sec. 120.838 Expiration of existing, temporary expansions.
All existing, temporary expansions of Areas of Operation shall
expire 6 months after March 1, 1996, unless a CDC applies for permanent
expansion before the expiration date.
Sec. 120.839 Case-by-case extensions.
(a) A CDC may apply to make an individual loan for a Project
outside its Area of Operations to the District Office serving the area
in which the Project will be located if:
(1) The applicant CDC has previously assisted the business to
obtain a 504 loan;
(2) The applicant small business or CDC can document in writing to
the AA/FA specific circumstances that would prevent the existing CDC or
CDCs serving the area from assisting the business adequately; and
(3) The existing CDC or CDCs serving the area agree to permit the
applicant CDC to make the loan.
(b) The applicant CDC must demonstrate that it adequately can
service the loan.
(c) The AA/FA may approve the request for good cause shown.
Accredited Lenders Program (ALP)
Sec. 120.840 Accredited Lenders Program.
The SBA may designate a CDC as an Accredited Lender. SBA will
provide an Accredited Lender with expedited loan processing or
servicing action.
(a) Applications. CDCs may apply to the SBA field office with which
it is most active. The SBA office will send its recommendation and the
application to the AA/FA for final decision.
(b) Eligibility. In order to be eligible to receive Accredited
Lender status, a CDC must have been an active participant in the 504
loan program for not less than the preceding 12 months. In evaluating
an application to be an Accredited Lender, SBA will consider all
relevant factors, including:
(1) The CDC's ability to work with the local SBA office;
(2) The quality of past performance; and
(3) The quality of the loan portfolio, including the default rate.
(c) Term of designation. CDCs will be designated as ALPs for a two
year period, and are eligible to renew the designation for additional
two year periods.
(d) Suspension and revocation. The AA/FA may suspend or revoke ALP
designation upon written notice stating the reasons therefore at least
10 business days prior to the effective date of the suspension or
revocation. Reasons for suspension or revocation may include loan
performance unacceptable to SBA or violations of applicable statutes,
regulations or published SBA policies and procedures. An ALP may appeal
the suspension or revocation made under this section pursuant to the
procedures set forth in part 134 of this chapter. The action of the AA/
FA shall remain in effect pending resolution of the appeal.
Premier Certified Lenders Program
Sec. 120.845 Premier Certified Lenders Program.
The SBA has established a pilot program to designate a number of
CDCs as Premier Certified Lenders (``PCLPs''), which will be able to
process, approve, close and service 504 loans.
(a) Characteristics. Loans processed through the PCL Program will
be subject to the same loan terms and conditions as other 504 loans,
but final approval by SBA will be limited to eligibility of the
guarantee.
(b) Applications. A CDC may obtain information concerning this
program from SBA's Office of Pilot Operations in Washington, D.C. A CDC
may apply to the SBA field office with which it is most active. The SBA
office will send the application with a recommendation to the AA/FA for
final decision.
(c) Eligibility. SBA will consider the CDC's ability to work with
the local SBA office and the quality of past performance.
(d) Loss reserve. A PCLP must establish a loss reserve for its
financings under this program, secured by its segregated assets in
favor of SBA, in the amount of the PCLP's historic loss rate or 10
percent of its exposure under the PCLP program, whichever is greater.
The PCLP must contribute to the loss reserve for each such financing at
the times and in the amounts established by law.
(e) Review. The SBA shall review a PCLP's financings at least
annually.
(f) Suspension and revocation. The AA/FA may suspend or revoke PCLP
designation upon written notice stating the reasons therefore at least
10 business days prior to the effective date of the suspension or
revocation. Reasons for suspension or revocation may include loan
performance unacceptable to SBA, failure to meet loss reserve or
eligibility criteria, or violations of applicable statutes, regulations
or published SBA policies and procedures. A PCLP may appeal the
suspension or revocation made under this section pursuant to the
procedures set forth in part 134 of this chapter. The action of the AA/
FA shall remain in effect pending resolution of the appeal.
(g) Program period. On October 1, 1997, the PCLP pilot program
ends.
Associate Development Companies (ADCs)
Sec. 120.850 ADC functions.
(a) An ADC must support local economic development efforts. An ADC
[[Page 3261]]
may package, close, and service loans for a CDC under a written
contract approved by SBA. Such contracts must meet Service Provider
criteria, and specify the rights and responsibilities of the parties
(including payment terms). The CDC remains solely responsible to SBA
for the processing, closing, and servicing of the loan. It may not
charge the Borrower a higher fee because it is using the ADC's
services.
(b) An ADC must operate in accordance with statutes, regulations,
policy notices, SBA's Standard Operating Procedures (SOPs), and the
information in its application. It must supply to SBA current and
accurate information about all certification and operational
requirements, and maintain the records required by SBA.
Sec. 120.851 ADC eligibility and operating requirements.
(a) An ADC must demonstrate to SBA and maintain the following:
(1) Adequate management ability;
(2) A Board of Directors meeting at least quarterly and chosen from
the membership by the members;
(3) A professional staff, including at least one qualified full-
time professional with small business lending experience available
during regular business hours; and
(4) A budget or financial statements showing the financial
capability and funding to sustain continuing operations.
(b) An ADC may contract out for staff services only if SBA gives
prior approval. The contract, subject to SBA audit, may not be self-
serving, and compensation must be reasonable and customary.
Sec. 120.852 Suspension and revocation of ADCs.
SBA may require corrective action, or the AA/FA may suspend or
revoke ADC status upon written notice stating the reasons therefore at
least 10 business days prior to the effective date of the suspension or
revocation. Reasons for suspension or revocation may include violations
of applicable statutes, regulations or published SBA policies and
procedures. An ADC may appeal the suspension or revocation made under
this section pursuant to the procedures set forth in part 134 of this
chapter. The action of the AA/FA shall remain in effect pending
resolution of the appeal.
Ethical Requirements
Sec. 120.855 CDC and ADC ethical requirements.
CDCs, ADCs and their Associates must act ethically and exhibit good
character. They must meet all of the ethical requirements of
Sec. 120.140. In addition, they are subject to the following:
(a) Any benefit flowing to an Associate or his or her employer from
activities as an Associate must be merely incidental (this requirement
does not prevent an Associate or an Associate's employer from engaging
in a business relationship with the CDC and/or the Borrower in the
regular course of business, including providing interim financing or
Third-Party loans); and
(b) Unless waived by SBA for good cause, an Associate may not be an
officer, director, or manager of more than one CDC or ADC (except that
the membership or Board of Directors of a broader-based CDC may include
a member or director of a local CDC within its Area of Operations).
Project Economic Development Goals
Sec. 120.860 Required objectives.
A Project must achieve at least one of the economic development
objectives set forth in Sec. 120.861 or Sec. 120.862.
Sec. 120.861 Job creation or retention.
A Project must create or retain one Job Opportunity for every
$35,000 guaranteed by SBA.
Sec. 120.862 Other economic development objectives.
A Project that achieves any of the following community development
or public policy goals is eligible if the CDC's overall portfolio of
504 loans, including the subject loan, meets or exceeds the CDC's
required Job Opportunity average. Loan applications must indicate how
the Project will meet the specified economic development objective.
(a) Community Development goals:
(1) Improving, diversifying or stabilizing the economy of the
locality;
(2) Stimulating other business development;
(3) Bringing new income into the community;
(4) Assisting manufacturing firms (Standard Industrial
Classification Manual (SIC) Codes 20-49); or
(5) Assisting businesses in Labor Surplus Areas as defined by the
Department of Labor.
(b) Public Policy goals:
(1) Revitalizing a business district of a community with a written
revitalization or redevelopment plan;
(2) Expanding exports;
(3) Expanding Minority Enterprise development (See Sec. 124.103(b)
of this chapter);
(4) Aiding rural development;
(5) Increasing productivity and competitiveness (retooling,
robotics, modernization, competition with imports);
(6) Modernizing or upgrading facilities to meet health, safety, and
environmental requirements; or
(7) Assisting businesses affected by Federal budget reductions,
including base closings, either because of the loss of Federal
contracts or the reduction in revenues due to a decreased Federal
presence.
Leasing Policies Specific to 504 Loans
Sec. 120.870 Leasing Project Property.
(a) A Borrower may use the proceeds of a 504 loan to acquire,
construct, or modify buildings and improvements, and/or to purchase and
install machinery and equipment located on land leased to the Borrower
by the CDC or an unrelated lessor if:
(1) The remaining term of the lease, including options to renew,
exercisable solely by the lessee, equals or exceeds the term of the
Debenture, or, in the case of machinery or equipment, equals or exceeds
the useful life of the property or the term of the Debenture, whichever
is lesser;
(2) The Borrower assigns its interest in the lease to the CDC with
right of reassignment to SBA; and
(3) The 504 loan is secured by a recorded lien against the
leasehold estate and other collateral as necessary.
(b) If a CDC leases property to a small business, the rent paid by
the small business during the term of the Debenture must be enough to
pay principal and interest on all debt incurred by the CDC to finance
the Project, and all related expenses. The rent also may include a
reasonable return on the CDC's investment.
Sec. 120.871 Leasing part of an existing building to another business.
(a) The costs of interior finishing of space to be leased out to
another business are not eligible Project costs.
(b) Third-party loan proceeds used to renovate the leased space do
not count towards the 504 first mortgage requirement or the Borrower's
contribution.
Loan-Making Policies Specific to 504 Loans
Sec. 120.880 Basic eligibility requirements.
In addition to the eligibility requirements specified in subpart A,
to be an eligible Borrower for a 504 loan, a small business must:
(a) Use the Project Property (except that an Eligible Passive
Company may lease to an Operating Company); and
(b) Together with its affiliates, meet one of the following size
standards:
[[Page 3262]]
(1) It does not have a tangible net worth in excess of $6 million,
and does not have an average net income after Federal income taxes
(excluding any carry-over losses) for the preceding two years in excess
of $2 million; or
(2) It meets the size standards in Part 121 of this chapter for the
industry in which it is primarily engaged.
Sec. 120.881 Ineligible Projects for 504 loans.
In addition to the ineligible businesses and uses of proceeds
specified in subpart A of this part, the following Projects are
ineligible for 504 financing:
(a) Relocation of any of the operations of a small business which
will cause a net reduction of one-third or more in the workforce of a
relocating small business or a substantial increase in unemployment in
any area of the country, unless the CDC can justify the loan because:
(1) The relocation is for key economic reasons and crucial to the
continued existence, economic wellbeing, and/or competitiveness of the
applicant; and
(2) The economic development benefits to the applicant and the
receiving community outweigh the negative impact on the community from
which the applicant is moving; and
(b) Projects in foreign countries (loans financing real or personal
property located outside the United States or its possessions).
Sec. 120.882 Eligible Project costs for 504 loans.
Eligible Project costs which may be paid with the proceeds of 504
loans are:
(a) Costs directly attributable to the Project including
expenditures incurred by the Borrower (with its own funds or from a
loan):
(1) To acquire land used in the Project prior to applying to SBA
for the 504 loan; or
(2) For any other expense toward a Project within nine months prior
to receipt by SBA of a complete loan application, unless the time limit
is extended or waived by SBA for good cause;
(b) In Projects involving construction, a contingency reserve for
cost overruns not to exceed 10 percent of construction cost;
(c) Professional fees directly attributable and essential to the
Project, such as title insurance, architecture, engineering,
accounting, environmental studies, and legal fees (other than legal
fees associated with the closing); and
(d) Repayment of interim financing including points, fees and
interest.
Sec. 120.883 Eligible administrative costs for 504 loans.
The following costs and fees are not part of Project costs but may
be paid with the proceeds of the 504 loan and the Debenture (see
Sec. 120.971):
(a) SBA guarantee fee;
(b) Funding fee (to cover the cost of a public issuance of
securities and the Trustee);
(c) CDC processing fee;
(d) Closing costs, other than legal fees; and
(e) Underwriters fee.
Sec. 120.884 Ineligible costs for 504 loans.
Costs not directly attributable and necessary for the Project may
not be paid with proceeds of the 504 loan. These include, but are not
limited to, the following:
(a) Debt refinancing (other than interim financing).
(b) Third-Party Loan fees (commitment, broker, finders,
origination, processing fees of permanent financing).
(c) Ancillary business expenses, such as:
(1) Working capital;
(2) Counseling or management services fees;
(3) Incorporation/organization costs;
(4) Franchise fees; and
(5) Advertising.
(d) Fixed-asset Project components, such as:
(1) Short-term equipment, furniture, and furnishings (unless
essential to and a minor portion of the Project);
(2) Automobiles, trucks, and airplanes; and
(3) Construction equipment (except for heavy duty construction
equipment integral to a business' operations and meeting the IRS
definition of capital equipment).
(e) Closing legal fees.
Interim Financing
Sec. 120.890 Source of interim financing.
A Project may use interim financing for all Project costs except
the Borrower's contribution. Any source (including a CDC) may supply
interim financing provided:
(a) The financing is not derived from any SBA program, directly or
indirectly;
(b) The terms and conditions of the financing are acceptable to
SBA;
(c) The source is not the Borrower or an Associate of the Borrower;
and
(d) The source has the experience and qualifications to monitor
properly all Project construction and progress payments. (If the source
lacks such experience or qualifications, SBA may require the interim
loan to be managed by a third party such as a bank or professional
construction manager.)
Sec. 120.891 Certifications of disbursement and completion.
Before the Debenture is issued, the interim lender must certify the
amount disbursed. The CDC must certify that the Project was completed
in accordance with the final plans and specifications (except as
provided in Sec. 120.961).
Sec. 120.892 Certifications of no adverse change.
Following completion of the Project, the following certifications
must be made before the 504 loan closing:
(a) The interim lender must certify to the CDC that it has no
knowledge of any unremedied substantial adverse change in the condition
of the small business since the application to the interim lender;
(b) The Borrower (or Operating Company) must certify to the CDC
that there has been no unremedied substantial adverse change in its
financial condition or its ability to repay the 504 loan since the date
of application, and must furnish interim financial statements, current
within 90 days of closing; and
(c) The CDC must issue an opinion to the best of its knowledge that
there has been no unremedied substantial adverse change in the
Borrower's (or Operating Company's) ability to repay the 504 loan since
its submission of the loan application to SBA.
Permanent Financing
Sec. 120.900 What are the sources of permanent financing?
Permanent financing for each Project must come from three sources:
the Borrower's contribution, Third-Party Loans, and the 504 loan.
Typically, the Borrower contributes 10 percent of the permanent
financing, Third-Party Loans 50 percent and the 504 loan 40 percent.
The Borrower's Contribution
Sec. 120.910 How much must the Borrower contribute?
The Borrower must contribute to the Project cash (or property
acceptable to SBA obtained with the cash) or land (that is part of the
Project Property) valued at 10 percent or more of the Project cost
(exclusive of administrative cost). The source of the contribution may
be a CDC or any other source except an SBA business loan program (see
Sec. 120.913 for SBIC exception).
Sec. 120.911 Land contributions.
The Borrower's contribution may be land (including buildings,
structures and other site improvements which will be part of the
Project Property)
[[Page 3263]]
previously acquired by the Borrower or the CDC.
Sec. 120.912 Borrowed contributions.
The Borrower may borrow its cash contribution from the CDC or a
third party. If any of the contribution is borrowed, the interest rate
must be reasonable. If the loan is secured by any of the Project
assets, the loan must be subordinate to the liens securing the 504
Loan, and the loan may not be repaid at a faster rate than the 504 Loan
unless SBA gives prior written approval. A third party lender may not
receive voting rights, stock options, or any other actual or potential
voting interest in the small business.
Sec. 120.913 May an SBIC provide the contribution?
Subject to part 107 of this chapter, SBIC's may provide financing
for all or part of the Borrower's contribution to the project. SBA
shall consider SBIC funds to be derived from federal sources if the
SBIC has leverage (as defined in part 107 of this chapter). If the SBIC
does not have leverage, the investment will be considered to be from
private funds. SBIC financing must be subordinated to the 504 loan and
may not be repaid at a faster rate than the Debenture.
Third Party Loans
Sec. 120.920 The first lien position.
The Borrower must obtain one or more Third Party Loans totaling at
least as much as the 504 loan. Third Party Loans usually have the first
lien position. They cannot be guaranteed by SBA.
Sec. 120.921 Terms of Third Party loans.
(a) Maturity. A Third Party Loan must have a term of at least 7
years when the 504 loan is for a term of 10 years and 10 years when the
504 loan is for 20 years. If there is more than one Third Party Loan,
an overall loan maturity must be calculated, taking into account the
maturities and amounts of each loan. If there is a balloon payment, it
must be justified in the loan report and clearly identified in the Loan
Authorization.
(b) Interest rates. Interest rates must be reasonable. SBA must
establish and publish in the Federal Register a maximum interest rate
for any Third Party Loan from commercial financial institutions. The
rate shall remain in effect until changed.
(c) Other terms. The Third Party Loan must not have any early call
feature or contain any demand provisions unless the loan is in default.
By participating, a Third Party Loan lender waives, as to the CDC/SBA
financing, any provision in its deed of trust, or mortgage, or other
documents prohibiting further encumbrances or subordinate debt. In the
event of default, the Third Party Lender must give the CDC and SBA
written notice of default within 30 days of the event of default and at
least 60 days prior to foreclosure.
(d) Subordination. A Third-Party Loan lienholder must subordinate
to the CDC/SBA lien any future advance in excess of the outstanding
principal balance and accrued interest of the Third Party Loan at the
time of such advance except expenditures for collection, maintenance,
and protection of the Third Party Loan lienholder's lien position.
(e) Escalation upon default. A Third-Party Lender may not escalate
the rate of interest upon default to an amount greater than the maximum
rate set forth in paragraph (b) of this section.
Sec. 120.922 Pre-existing debt on the Project Property.
In addition to its share of Project cost, a Third-Party Loan may
include consolidation of existing debt on the Project Property. The
consolidation must not improve the lien position of the Lender on the
pre-existing debt, unless the debt is a previous Third-Party Loan.
Sec. 120.923 What are the policies on subordination?
(a) Financing provided by the seller of Project Property must be
subordinate to the 504 loan. SBA may waive the subordination
requirement if the property is classified as ``other real estate
owned'' by a national bank or other Federally regulated lender and SBA
considers the property to be of sufficient value to support the 504
loan.
(b) A Borrower is eligible for a 504 loan even if part of the
Project financing is tax-exempt. SBA's lien position must not be
subordinate to loans made from the proceeds of the tax-exempt
obligation.
Sec. 120.924 Prepayment of subordinate financing.
The Borrower must not prepay any Project financing subordinate to
the 504 loan without SBA's prior written consent.
Sec. 120.925 Preferences.
No Third Party Lender shall establish a Preference.
Sec. 120.926 Referral fee.
The CDC may receive a referral fee from the Third Party Lender if
the CDC secured the lender for the Borrower under a written contract.
The Borrower cannot pay this fee. If a CDC charges a referral fee, the
CDC will be construed as a Referral Agent under part 103 of this
chapter.
504 Loans and Debentures
Sec. 120.930 Amount.
(a) Generally, a 504 loan may not exceed 40 percent of total
Project cost plus 100 percent of eligible administrative costs. For
good cause shown, SBA may authorize an increase in the percentage of
Project costs covered up to 50 percent. No more than 50 percent of
eligible Project costs can be from Federal sources, whether received
directly or indirectly through an intermediary.
(b) Generally, the minimum 504 loan must be $50,000, although, upon
good cause shown, SBA may permit a 504 loan as small as $25,000. The
amount of the Debenture must equal the amount of the 504 Loan plus
administrative costs.
(c) Upon completion of the Project, the Debenture amount will be
reduced by the amount that the unused contingency reserve exceeds 2
percent of the anticipated Debenture.
Sec. 120.931 504 lending limits.
The outstanding balance of all SBA financial assistance to a
Borrower and its affiliates under the 504 program covered by this Part
must not exceed $750,000 ($1,000,000 if one or more of the public
policy goals enumerated in Sec. 120.862(b) applies to the Project).
Sec. 120.932 Interest rate.
The interest rate of the 504 Loan and the Debenture which funds it
is set by the SBA and approved by the Secretary of the Treasury.
Sec. 120.933 Maturity.
The term of a 504 Loan and the Debenture which funds it shall be
either 10 or 20 years.
Sec. 120.934 Collateral.
The CDC/SBA takes a junior lien position (usually a second lien) on
the Project collateral. In rare circumstances, collateral other than
the Project collateral may be accepted by SBA. Sometimes secondary
collateral is required. All collateral must be insured against such
hazards and risks as SBA may require, with provisions for notice to SBA
and the CDC in the event of impending lapse of coverage.
Sec. 120.935 Deposit.
At the time of application for a 504 loan, the CDC may require a
deposit from the Borrower of $2,500 or 1 percent of the Net Debenture
Proceeds, whichever is less. The deposit may be
[[Page 3264]]
applied to the loan processing fee if the application is accepted, but
must be refunded if the application is denied. If the small business
withdraws its application, the CDC may deduct from the deposit
reasonable costs incurred in packaging and processing the application.
Sec. 120.936 Subordination to CDC.
SBA, in its sole discretion, may permit subordination of the
Debenture to any other obligation of the CDC, except debt incurred by
the CDC to obtain funds to loan to the Borrower for the Borrower's
required contribution to the Project financing.
Sec. 120.937 Assumption.
A 504 loan may be assumed with SBA's prior written approval.
Sec. 120.938 Default.
(a) Upon occurrence of an event of default specified in the 504
note which requires automatic acceleration, the note becomes due and
payable. Upon occurrence of an event of default which does not require
automatic acceleration, SBA may forbear acceleration of the note and
attempt to resolve the default. If the default is not cured
subsequently, the note shall be accelerated. In either case, upon
acceleration of the note, the Debenture which funded it is also due
immediately, and SBA must honor its guarantee of the Debenture. SBA
shall not reimburse the investor for any premium paid.
(b) If a CDC defaults on a Debenture, SBA generally shall limit its
recovery to the payments made by the small business to the CDC on the
loan made from the Debenture proceeds, and the collateral securing the
defaulted loan. However, SBA will look to the CDC for the entire amount
of the Debenture in the case of fraud, negligence, or misrepresentation
by the CDC.
Sec. 120.939 Borrower prohibition.
Neither a Borrower nor an Associate of the Borrower may purchase an
interest in a Debenture Pool in which the Debenture that funded its 504
loan has been placed.
Sec. 120.940 Prepayment of the 504 loan or Debenture.
The Borrower may prepay its 504 loan, if it pays the entire
principal balance, unpaid interest, any unpaid fees, and any prepayment
premium established in the note. If the Borrower prepays, the CDC must
prepay the corresponding Debenture with interest and premium. If one of
the Debentures in a Debenture Pool is prepaid, the Investors in that
Debenture Pool must be paid pro rata, and SBA's guarantee on the entire
Debenture Pool must be proportionately reduced. If the entire Debenture
Pool is paid off, SBA may call all Certificates backed by the Pool for
redemption.
Sec. 120.941 Certificates.
(a) The face value of a Certificate must be at least $25,000.
Certificates are issued in registered form and transferred only by
entry on the central registry maintained by the Trustee. SBA guarantees
the timely payment of principal and interest on the Certificates.
(b) Before the sale of a Certificate, the seller, or the broker or
dealer acting as the seller's agent, must disclose to the purchaser the
terms, conditions, yield, and premium and other characteristics not
guaranteed by SBA.
Debenture Sales and Service Agents
Sec. 120.950 SBA and CDC must appoint agents.
SBA and the CDC must appoint the following agents to facilitate the
sale and service of the Certificates and disbursement of the proceeds.
Sec. 120.951 Selling agent.
The CDC, with SBA approval, shall appoint a Selling Agent to select
underwriters, negotiate the terms and conditions of Debenture offerings
with the underwriters, and direct and coordinate Debenture sales.
Sec. 120.952 Fiscal agent.
SBA shall appoint a Fiscal Agent to assess the financial markets,
minimize the cost of sales, arrange for the production of the Offering
Circular, Debenture Certificates, and other required documents, and
monitor the performance of the Trustee and the underwriters.
Sec. 120.953 Trustee.
SBA must appoint a Trustee to:
(a) Issue Certificates;
(b) Transfer the Certificates upon resale in the secondary market;
(c) Maintain physical possession of the Debentures for SBA and the
Certificate holders;
(d) Establish and maintain a central registry of:
(1) Debenture Pools, including the CDC obligors and the interest
rate payable on the Debentures in each Pool;
(2) Certificates issued or transferred, including the Debenture
Pool backing the Certificate, name and address of the purchaser, price
paid, the interest rate on the Certificate, and fees or charges
assessed by the transferror; and
(3) Brokers and dealers in Certificates, and the commissions, fees
or discounts granted to the brokers and dealers;
(e) Receive semi-annual Debenture payments and prepayments;
(f) Make regularly scheduled and prepayment payments to Investors;
and
(g) Assure before any resale of a Debenture or Certificate is
recorded in the registry that the seller has provided the purchaser a
written disclosure statement approved by SBA.
Sec. 120.954 Central Servicing Agent.
(a) SBA has entered into a Master Servicing Agreement designating a
Central Servicing Agent (CSA) to support the orderly flow of funds
among Borrowers, CDCs, and SBA. The CDC and Borrower must enter into an
individual Servicing Agent Agreement with the CSA for each 504 loan,
constituting acceptance by the CDC and the Borrower of the terms of the
Master Servicing Agreement.
(b) The CSA has established a master reserve account. All funds
related to the 504 loans and Debentures flow through the master reserve
account under the provisions of the Master Servicing Agreement. The
master reserve account will be funded by a guarantee fee, a funding fee
to be published from time to time in the Federal Register, and by
principal and interest payments of 504 loans. At SBA's direction, the
CSA may use funds in the master reserve account to defray program
expenses. In the event a Borrower defaults and its 504 note is
accelerated, SBA shall add funds under its guarantee to ensure the full
and timely payment of the Debenture which funded the 504 loan. At SBA's
direction, the CSA must pay to the CDC servicing each loan the interest
accruing in the master reserve account on loan payments made by each
Borrower between the date of receipt of each monthly payment and the
date of disbursement to investors. The CSA may disburse such interest
periodically to CDCs on a pro rata basis. SBA may use interest accruals
in the master reserve account earned prior to October 1991 (not
previously distributed to the CDCs) for the costs of 504 program
administration.
Sec. 120.955 Agent bonds and records.
(a) Each agent (in Secs. 120.951 through 120.954) must provide a
fidelity bond or insurance in such amount as necessary to fully protect
the interest of the government.
(b) SBA must have access at the agent's place of business to all
books, records and other documents relating to Debenture activities.
Sec. 120.956 Suspension or revocation of brokers and dealers.
The AA/FA may suspend or revoke the privilege of any broker or
dealer to
[[Page 3265]]
participate in the sale or marketing of Debentures and Certificates for
actions or conduct bearing negatively on the broker's fitness to
participate in the securities market. SBA must give the broker or
dealer written notice, stating the reasons therefore, at least 10
business days prior to the effective date of the suspension or
revocation. A broker or dealer may appeal the suspension or revocation
made under this section pursuant to the procedures set forth in part
134 of this chapter. The action of the AA/FA will remain in effect
pending resolution of the appeal. SBA may suspend or revoke the
opportunity for a hearing under part 134 of this chapter.
Closings
Sec. 120.960 Responsibility for closing.
The CDC is responsible for the 504 Loan closing. The Debenture
closing is the joint responsibility of the CDC and SBA.
Sec. 120.961 Construction escrow accounts.
The CSA, title company, CDC attorney, or bank may hold Debenture
proceeds in escrow to complete Project components such as landscaping
and parking lots, and acquire machinery and equipment if the component
or acquisition is a minor portion of the total Project and has been
contracted for completion or delivery at a specified price and specific
future date. The escrow agent must disburse funds upon approval by the
CDC and the SBA, supported by invoices and payable jointly to the small
business and the designated contractor.
Servicing and Fees
Sec. 120.970 Servicing of 504 loans and Debentures.
The CDC must service the 504 loan in accordance with the Loan
Authorization, these regulations, SBA policies and procedures, and
prudent lending standards until paid in full, including review of the
small business's financial statements, tax filings, insurance, and
security filings. In doing so, CDCs must comply with the provisions of
Sec. 120.513. In addition, CDCs must comply with the servicing
requirements set forth in SBA's SOP. CDCs must report promptly to SBA
any adverse trend, condition or information relevant to a Borrower.
Upon request by a CDC, SBA may agree to defer a Borrower's monthly
payment. SBA may negotiate agreements with CDCs to liquidate loans.
Sec. 120.971 Allowable fees paid by Borrower.
(a) CDC fees. CDCs may charge the following fees to the Borrower:
(1) Processing fee. The CDC may charge up to 1.5 percent of the net
Debenture proceeds to process the financing. Two-thirds of this fee
will be considered earned and may be collected by the CDC when the
Authorization for the Debenture is issued by SBA. The portion of the
processing fee paid by the Borrower may be reimbursed from the
Debenture proceeds;
(2) Closing fee. The CDC may charge a fee to cover an amount
sufficient to reimburse it for reasonable legal expenses of in-house or
outside legal counsel. The CDC may also charge a fee to cover
reasonable miscellaneous closing costs. Closing costs, other than legal
fees, may be funded out of the Debenture proceeds;
(3) Servicing fee. The CDC will charge a monthly servicing fee of
not less than 0.5 percent per annum nor more than 2 percent per annum
on the unpaid balance of the loan as determined at five-year
anniversary intervals. A servicing fee in excess of 1.5 percent in a
Rural Area and 1 percent everywhere else requires SBA's prior written
approval, based on evidence of substantial need. The servicing fee may
be paid only from loan payments received. The fees may be accrued
without interest and collected from the CSA when the payments are made;
(4) Late fees. Loan payments received after the 15th of each month
may be subject to a late payment fee of 5 percent of the late payment
or $100, whichever is greater. These fees will be collected by the CSA
on behalf of the CDC; and
(5) Assumption fee. Upon SBA's written approval, a CDC may charge
an assumption fee not to exceed 1 percent of the outstanding principal
balance of the loan being assumed.
(b) CSA fees. The CSA may charge an initiation fee on each loan and
a monthly servicing fee under the terms of the Master Servicing
Agreement.
(c) Other agent fees. Agent fees and charges necessary to market
and service Debentures and Certificates may be assessed to the Borrower
or the investor. The fees must be approved by SBA and published
periodically in the Federal Register.
(d) SBA fees. (1) SBA charges a 0.5 percent guarantee fee on the
Debenture.
(2) For those loans approved after October 1, 1995, SBA charges a
fee of 0.125 per annum on the unpaid principal balance of the loan as
determined at five-year anniversary intervals.
(e) Miscellaneous fees. A funding fee not to exceed 0.25 percent of
the Debenture may be charged to cover costs incurred by the trustee,
fiscal agent, transfer agent.
Sec. 120.972 Oversight and evaluation of CDCs and ADCs.
SBA may conduct an operational review of a CDC or ADC. The SBA
Office of Inspector General may conduct, supervise or coordinate audits
pursuant to the Inspector General Act. The CDC or ADC must cooperate
and make its staff, records, and facilities available.
CDC Transfer, Suspension and Revocation
Sec. 120.980 Transfer of CDC to ADC status.
SBA shall transfer to ADC status any CDC that fails to meet the
activity level required by SBA, on average over two consecutive fiscal
years. SBA shall notify the CDC in writing of the action and of the
opportunity for a hearing pursuant to part 134 of this chapter at least
10 business days prior to the transfer. During the pendency of a
hearing, SBA's action will remain in effect.
Sec. 120.981 Voluntary transfer and surrender of CDC certification.
A CDC may not transfer its certification or withdraw from the 504
program without SBA's consent. The CDC must provide a plan to SBA to
transfer its portfolio. The portfolio may only be transferred with
SBA's written consent. If a CDC desires to withdraw from the 504
program, it must forfeit its portfolio to SBA. SBA may conduct an audit
of the transferring or withdrawing CDC.
Sec. 120.982 Correcting CDC servicing deficiencies.
SBA may require corrective action, including the transfer of
existing or pending financings to another CDC in good standing. SBA
must notify the CDC in writing of any servicing, reporting or
collection deficiencies and the corrective actions to be taken. SBA may
instruct the CSA to withhold service and late fees and may assess the
CDC up to $250 per day for expenses incurred by SBA to correct the
deficiencies. If non-compliance continues for 90 days, SBA may take the
fees as compensation for its efforts to obtain compliance.
Sec. 120.983 Transfer of CDC servicing to SBA or another CDC.
If a CDC fails to correct servicing deficiencies, or is unable or
unwilling to service its portfolio, SBA may assume the servicing or
require the transfer of all or part of the CDC's portfolio to
[[Page 3266]]
another CDC within or adjoining the deficient CDC's Area of Operations.
If there is no suitable CDC, SBA may approve a transfer to another
entity. Future service fees from transferred loans will be paid to the
transferee. In addition, the CDC's processing authority will be
temporarily suspended.
Sec. 120.984 Suspension or revocation of CDC certification.
(a) Suspend or revoke. The AA/FA may suspend or revoke the CDC's
certification if a CDC:
(1) Violates a statute, an SBA regulation, or the terms of a
Debenture, authorization, or agreement with SBA;
(2) Makes a material false statement, knowingly misrepresents, or
fails to state a material fact;
(3) Fails to maintain good character;
(4) Fails to operate according to prudent lending standards;
(5) Fails to correct servicing, collection, reporting, or other
deficiencies; or
(6) Is unable or unwilling to operate in accordance with the
requirements of this part.
(b) Transfer portfolio. Upon suspension or revocation, the CDC must
transfer its remaining portfolio and any 504 applications or financings
in process to another CDC designated or approved by SBA. If a pending
504 financing is completed after a transfer, any deposit must also be
transferred. Any fees must be apportioned by SBA between the two CDCs
in proportion to services performed.
(c) Provide written notice. SBA must give written notice to the CDC
at least 10 business days prior to the effective date of a suspension
or revocation, informing the CDC of the opportunity for a hearing
pursuant to part 134 of this chapter.
Enforceability of 501, 502 and 503 Loans and Other Laws
Sec. 120.990 501, 502, and 503 loans.
SBA has discontinued loan programs for 501, 502, and 503 loans.
Outstanding loans remain under these programs, and Borrowers, CDCs, and
SBA must comply with the terms and conditions of the corresponding
notes and Debentures, and the regulations in this part in effect when
the obligations were undertaken or last in effect, if applicable.
Sec. 120.991 Effect of other laws.
No State or local law may preclude or limit SBA's exercise of its
rights with respect to notes, guarantees, Debentures and Debenture
Pools, or of its enforcement rights to foreclose on collateral.
PARTS 108, 116, 122, and 131--[REMOVED]
2. Parts 108, 116, 122, and 131 are removed.
Dated: January 22, 1996.
John T. Spotila,
Acting Administrator.
[FR Doc. 96-1432 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P
Complete official Federal Register PDF
FR Doc. 96-1351 PART 107SMALL BUSINESS INVESTMENT COMPANIES
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3189-3226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1351]
PART 107--SMALL BUSINESS INVESTMENT COMPANIES
Subpart A--Introduction to Part 107
Sec.
107.20 Legal basis and applicability of this part 107.
107.30 Amendments to Act and regulations.
107.40 How to read this part 107.
Subpart B--Definition of Terms Used in Part 107
107.50 Definition of terms.
Subpart C--Qualifying for an SBIC License
Organizing an SBIC
107.100 Organizing a Section 301(c) Licensee.
107.110 Organizing a Section 301(d) Licensee.
107.115 1940 Act and 1980 Act Companies.
107.120 Special rules for a Section 301(d) Licensee owned by
another Licensee.
[[Page 3190]]
107.130 Requirement for qualified management.
107.140 SBA approval of initial Management Expenses.
107.150 Management and ownership diversity requirement.
107.160 Special rules for Licensees formed as limited partnerships.
Capitalizing an SBIC
107.200 Adequate capital for Licensees.
107.210 Minimum capital requirements for Licensees.
107.220 Special minimum capital requirements for Licensees issuing
Leverage.
107.230 Permitted sources of Private Capital for Licensees.
107.240 Limitations on including non-cash capital contributions in
Private Capital.
107.250 Exclusion of stock options issued by Licensee from
Management Expenses.
Applying for an SBIC License
107.300 License application form and fee.
Subpart D--Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
Changes in Control or Ownership of Licensee
107.400 Changes in ownership of 10 percent or more of Licensee but
no change of Control.
107.410 Changes in Control of Licensee (through change in ownership
or otherwise).
107.420 Prohibition on exercise of ownership or Control rights in
Licensee before SBA approval.
107.430 Notification to SBA of transactions that may change
ownership or Control.
107.440 Standards governing prior SBA approval for a proposed
transfer of Control.
107.450 Notification to SBA of pledge of Licensee's shares.
Restrictions on Common Control or Ownership of Two or More Licensees
107.460 Restrictions on Common Control or ownership of two (or
more) Licensees.
Change in Structure of Licensee
107.470 SBA approval of merger, consolidation, or reorganization of
Licensee.
Transfer of License
107.475 Transfer of license.
Subpart E--Managing the Operations of a Licensee
General Requirements
107.500 Lawful operations under the Act.
107.501 Identification as a Licensee.
107.502 Representations to the public.
107.503 Licensee's adoption of an approved Valuation Policy.
107.504 Computer capability requirements of Licensee.
107.505 Facsimile requirement.
107.506 Safeguarding Licensee's assets/Internal controls.
107.507 Violations based on false filings and nonperformance of
agreements with SBA.
107.508 Accessible office.
107.509 Employment of SBA officials.
Management and Compensation
107.510 SBA approval of Licensee's Investment Adviser/Manager
107.520 Management Expenses of a Licensee.
Cash Management by a Licensee
107.530 Restrictions on investments of idle funds by leveraged
Licensees.
Borrowing by Licensees From Non-SBA Sources
107.550 Prior approval of secured third-party debt of leveraged
Licensees.
107.560 Subordination of SBA's creditor position.
107.570 Restrictions on third-party debt of issuers of
Participating Securities.
Voluntary Decrease in Licensee's Regulatory Capital
107.585 Voluntary decrease in Licensee's Regulatory Capital.
Requirement To Conduct Active Investment Operations
107.590 Licensee's requirement to maintain active operations.
Subpart F--Recordkeeping, Reporting, and Examination Requirements for
Licensees
Recordkeeping Requirements for Licensees
107.600 General requirement for Licensee to maintain and preserve
records.
107.610 Required certifications for Loans and Investments.
107.620 Requirements to obtain information from Portfolio Concerns.
Reporting Requirements for Licensees
107.630 Requirement for Licensees to file financial statements with
SBA (Form 468).
107.640 Requirement to file Portfolio Financing Reports (SBA Form
1031).
107.650 Requirement to report portfolio valuations to SBA.
107.660 Other items required to be filed by Licensee with SBA.
107.670 Application for exemption from civil penalty for late
filing of reports.
107.680 Reporting changes in Licensee not subject to prior SBA
approval.
Examinations of Licensees by SBA for Regulatory Compliance
107.690 Examinations.
107.691 Responsibilities of Licensee during examination.
107.692 Examination fees.
Subpart G--Financing of Small Businesses by Licensees
Determining the Eligibility of a Small Business for SBIC Financing
107.700 Compliance with size standards in Part 121 of this Chapter
as a condition of Assistance.
107.710 Requirement to finance Smaller Businesses.
107.720 Small Businesses that may be ineligible for Financing.
107.730 Financings which constitute conflicts of interest.
107.740 Portfolio diversification (``overline'' limitation).
107.750 Conditions for financing a change of ownership of a Small
Business.
107.760 How a change in size or activity of a Portfolio Concern
affects the Licensee and the Portfolio Concern.
Structuring Licensee's Financing of Eligible Small Businesses: Types of
Financing
107.800 Financings in the form of Equity Securities.
107.810 Financings in the form of Loans.
107.815 Financings in the form of Debt Securities.
107.820 Financings in the form of guarantees.
107.825 Purchasing Securities from an underwriter or other third
party.
Structuring Licensee's Financing of an Eligible Small Business: Terms
and Conditions of Financing
107.830 Minimum duration/term of financing.
107.835 Exceptions to minimum duration/term of Financing.
107.840 Maximum term of Financing.
107.845 Maximum rate of amortization on Loans and Debt Securities.
107.850 Restrictions on redemption of Equity Securities.
107.855 Interest rate ceiling and limitations on fees charged to
Small Businesses (``Cost of Money'').
107.860 Financing fees and expense reimbursements a Licensee may
receive from a Small Business.
107.865 Restrictions on Control of a Small Business by a Licensee.
107.880 Assets acquired in liquidation of Portfolio securities.
Limitations on Disposition of Assets
107.885 Disposition of assets to Licensee's Associates or to
competitors of Portfolio Concern.
Management Services and Fees
107.900 Management fees for services provided to a Small Business
by Licensee or its Associate.
Subpart H--Non-leveraged Licensees-Exceptions to Regulations
107.1000 Licensees without Leverage--exceptions to the regulations.
Subpart I--SBA Financial Assistance for Licensees (Leverage)
General Information About Obtaining Leverage
107.1100 Types of Leverage available.
107.1110 How to apply for Leverage.
107.1120 General eligibility requirements for Leverage.
107.1130 Leverage fees payable by Licensee.
107.1140 Licensee's acceptance of SBA remedies under Secs. 107.1800
through 107.1820.
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Maximum Amount of Leverage for Which a Licensee Is Eligible
107.1150 Maximum amount of Leverage for a Section 301(c) Licensee.
107.1160 Maximum amount of Leverage for a Section 301(d) Licensee.
107.1170 Maximum amount of Participating Securities for any
Licensee.
Conditional Commitments by SBA To Reserve Leverage for a Licensee
107.1200 SBA's Leverage commitment to a Licensee--application
procedure, amount, and term.
107.1210 Commitment fees payable by Licensee.
107.1220 Requirement for Licensee to file quarterly financial
statements.
107.1230 Draw-downs by Licensee under SBA's Leverage commitment.
107.1240 Funding of Licensee's draw request through sale to short-
term investor.
Exchange of Outstanding Debentures for Participating or Preferred
Securities--Section 301(d) Licensees
107.1350 Exchange by Section 301(d) Licensee of Debentures for
Preferred or Participating Securities.
Preferred Securities Leverage--Section 301(d) Licensees
107.1400 Stock dividends or partnership distributions on 4 percent
Preferred Securities.
107.1410 Requirement to redeem 4 percent Preferred Securities.
107.1420 Articles requirements for 4 percent Preferred Securities
issuers.
107.1430 Redeeming 4 percent Preferred Securities with proceeds of
non-subsidized Debentures.
107.1440 Three percent preferred stock issued before November 21,
1989.
107.1450 Optional redemption of Preferred Securities.
Participating Securities Leverage
107.1500 General description of Participating Securities.
107.1505 Liquidity requirements for Licensees issuing Participating
Securities.
107.1510 How a Licensee computes Earmarked Profit (Loss).
107.1520 How a Licensee computes and allocates Prioritized Payments
to SBA.
107.1530 How a Licensee computes SBA's Profit Participation.
107.1540 Distributions by Licensee--Prioritized Payments and
Adjustments.
107.1550 Distributions by Licensee--permitted ``tax Distributions''
to private investors and SBA.
107.1560 Distributions by Licensee--required Distributions to
private investors and SBA.
107.1570 Distributions by Licensee--optional Distribution to
private investors and SBA.
107.1580 Special rules for In-Kind Distributions by Licensees.
107.1590 Special rules for companies licensed on or before March
31, 1993.
Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')
107.1600 SBA authority to issue and guarantee Trust Certificates.
107.1610 Effect of prepayment or early redemption of Leverage on a
Trust Certificate.
107.1620 Functions of agents, including Central Registration Agent,
Selling Agent and Fiscal Agent.
107.1630 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
107.1640 SBA access to records of the CRA, Brokers, Dealers and
Pool or Trust assemblers.
Miscellaneous
107.1700 Transfer by SBA of its interest in Licensee's Leverage
security.
107.1710 SBA authority to collect or compromise its claims.
Subpart J--Licensee's Noncompliance With Terms of Leverage
107.1800 Licensee's agreement to terms and conditions in
Secs. 107.1810 and 107.1820.
107.1810 Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures.
107.1820 Conditions affecting issuers of Preferred Securities and/
or Participating Securities.
Computation of Licensee's Capital Impairment
107.1830 Licensee's Capital Impairment--definition and general
requirements.
107.1840 Computation of Licensee's Capital Impairment Percentage.
107.1850 Exceptions to Capital Impairment provisions for Licensees
with outstanding Participating Securities.
Subpart K--Ending Operations as a Licensee
107.1900 Surrender of license.
Subpart L--Miscellaneous
107.1910 Non-waiver of SBA's rights or terms of Leverage security.
107.1920 Licensee's application for exemption from a regulation in
this part 107.
107.1930 Effect of changes in this part 107 on transactions
previously consummated.
Authority: 15 U.S.C. 681 et seq., 683, 687(c), 687b, 687d, 687g
and 687m.
Subpart A--Introduction to Part 107
Sec. 107.20 Legal basis and applicability of this part 107.
(a) The regulations in this part implement Title III of the Small
Business Investment Act of 1958, as amended. All Licensees must comply
with all applicable regulations, accounting guidelines and valuation
guidelines for Licensees.
(b) Provisions of this part which are not mandated by the Act shall
not supersede existing State law. A party claiming that a conflict
exists shall submit an opinion of independent counsel, citing
authorities, for SBA's resolution of the issues involved.
Sec. 107.30 Amendments to Act and regulations.
A Licensee shall be subject to all existing and future provisions
of the Act and Parts 107 and 112 of Title 13 of the Code of Federal
Regulations.
Sec. 107.40 How to read this part 107.
(a) Center Headings. All references in this part to SBA forms, and
instructions for their preparation, are to the current issue of such
forms. Center headings are descriptive and are used for convenience
only. They have no regulatory effect.
(b) Capitalizing defined terms. Terms defined in Sec. 107.50 are
capitalized in this part 107.
(c) The pronoun ``you'' as used in this part 107 means a Licensee
or license applicant, as appropriate, unless otherwise noted.
Subpart B--Definition of Terms Used in Part 107
Sec. 107.50 Definition of terms.
Accumulated Prioritized Payments has the meaning set forth in
Sec. 107.1520.
Act means the Small Business Investment Act of 1958, as amended.
Adjustments has the meaning set forth in Sec. 107.1520.
Affiliate or Affiliates has the meaning set forth in Sec. 121.401
of this chapter.
Articles mean articles of incorporation or charter for a Corporate
Licensee and the partnership agreement or certificate for a Partnership
Licensee.
Assistance or Assisted means Financing of or management services
rendered to a Small Business by a Licensee pursuant to the Act and
these regulations.
Associate of a Licensee means any of the following:
(1)(i) An officer, director, employee or agent of a Corporate
Licensee;
(ii) A Control Person, employee or agent of a Partnership Licensee;
(iii) An Investment Adviser/Manager of any Licensee, including any
Person who contracts with a Control Person of a Partnership Licensee to
be the Investment Adviser/Manager of such Licensee; or
(iv) Any Person regularly serving a Licensee on retainer in the
capacity of attorney at law.
(2) Any Person who owns or controls, or who has entered into an
agreement to own or control, directly or indirectly, at least 10
percent of any class of stock of a Corporate Licensee or a limited
partner's interest of at least 10 percent of the partnership capital of
a
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Partnership Licensee. However, a limited partner in a Partnership
Licensee is not considered an Associate if such Person is an entity
Institutional Investor whose investment in the Partnership, including
commitments, represents no more than 33 percent of the partnership
capital of the Licensee and no more than five percent of such Person's
net worth.
(3) Any officer, director, partner (other than a limited partner),
manager, agent, or employee of any Associate described in paragraph (1)
or (2) of this definition.
(4) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, a Licensee.
(5) Any Person that directly or indirectly Controls, or is
Controlled by, or is under Common Control with, any Person described in
paragraphs (1) and (2) of this definition.
(6) Any Close Relative of any Person described in paragraphs
(1),(2), (4), and (5) of this definition.
(7) Any Secondary Relative of any Person described in paragraphs
(1), (2), (4), and (5) of this definition.
(8) Any concern in which--
(i) Any Person described in paragraphs (1) through (6) of this
definition is an officer; or
(ii) Any such Person(s) singly or collectively Control or own,
directly or indirectly, an equity interest of at least 10 percent
(excluding interests that such Person(s) own indirectly through
ownership interests in the Licensee).
(9) Any concern in which any Person(s) described in paragraph (7)
of this definition singly or collectively own (including beneficial
ownership) a majority equity interest, or otherwise have Control. As
used in this paragraph (9), ``collectively'' means together with any
Person(s) described in paragraphs (1) though (7) of this definition.
(10) For the purposes of this definition, if any Associate
relationship described in paragraphs (1) through (7) of this definition
exists at any time within six months before or after the date that a
Licensee provides Financing, then that Associate relationship is
considered to exist on the date of the Financing.
(11) If any Licensee has any ownership interest in another
Licensee, the two Licensees are Associates of each other.
Capital Impairment has the meaning set forth in Sec. 107.1830(c).
Central Registration Agent or CRA means one or more agents
appointed by SBA for the purpose of issuing TCs and performing the
functions enumerated in Sec. 107.1620 and performing similar functions
for Debentures and Participating Securities funded outside the pooling
process.
Close Relative of an individual means:
(1) A current or former spouse;
(2) A father, mother, guardian, brother, sister, son, daughter; or
(3) A father-in-law, mother-in-law, brother-in-law, sister-in-law,
son-in-law, or daughter-in-law.
Combined Capital means the sum of Regulatory Capital and
outstanding Leverage.
Commitment means a written agreement between you and an eligible
Small Business that obligates you to provide Financing (except a
guarantee) to that Small Business in a fixed or determinable sum, by a
fixed or determinable future date. In this context the term
``agreement'' means that there has been agreement on the principal
economic terms of the Financing. You may include in the agreement
reasonable conditions precedent to your obligation to fund the
commitment but these conditions must be outside your control.
Common Control means a condition where two or more Licensees either
through ownership, management, contract, or otherwise, are under the
Control of one group or Person. Two or more Licensees are presumed to
be under Common Control if they are Affiliates of each other by reason
of common ownership or common officers, directors, or general partners;
or if they are managed or their investments are significantly directed
either by a common independent investment advisor or managerial
contractor, or by two or more such advisors or contractors that are
Affiliates of each other. This presumption may be rebutted by evidence
satisfactory to SBA.
Control means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
Licensee or other concern, whether through the ownership of voting
securities, by contract, or otherwise.
Control Person means any Person that controls a Licensee, either
directly or through an intervening entity. A Control Person includes:
(1) A general partner of a Partnership Licensee;
(2) Any Person serving as the general partner, officer, director,
or manager (in the case of a limited liability company) of any entity
that controls a Licensee, either directly or through an intervening
entity;
(3) Any Person that--
(i) Controls or owns, directly or through an intervening entity, at
least 10 percent of a Partnership Licensee or any entity described in
paragraphs (1) or (2) of this definition; and
(ii) Participates in the investment decisions of the general
partner of such Partnership Licensee;
(4) Any Person that controls or owns, directly or through an
intervening entity, at least 50 percent of a Partnership Licensee or
any entity described in paragraphs (1) or (2) of this definition.
Corporate Licensee. See definition of Licensee in this section.
Cost of Money has the meaning set forth in Sec. 107.855.
Debenture Rate means the interest rate, as published from time to
time in the Federal Register by SBA, for ten year debentures issued by
Licensees and funded through public sales of certificates bearing SBA's
guarantee. User or guarantee fees, if any, paid by a Licensee are not
considered in determining the Debenture Rate.
Debentures means debt obligations issued by Licensees pursuant to
section 303(a) of the Act and held or guaranteed by SBA.
Debt Securities has the meaning set forth in Sec. 107.815.
Disadvantaged Business means a Small Business that is at least 50
percent owned, and controlled and managed, on a day to day basis, by a
person or persons whose participation in the free enterprise system is
hampered because of social or economic disadvantages.
Distribution means any transfer of cash or non-cash assets to SBA,
its agent or Trustee, or to partners in a Partnership Licensee, or to
shareholders in a Corporate Licensee. Capitalization of Retained
Earnings Available for Distribution constitutes a Distribution to the
Licensee's non-SBA partners or shareholders.
Earmarked Assets has the meaning set forth in Sec. 107.1510(b).
(See also Sec. 107.1590.)
Earmarked Profit (Loss) has the meaning set forth in Sec. 107.1510.
Earned Prioritized Payments has the meaning set forth in
Sec. 107.1520.
Equity Capital Investments means investments in a Small Business in
the form of common or preferred stock, limited partnership interests,
options, warrants, or similar equity instruments, including
subordinated debt with equity features if such debt provides only for
interest payments contingent upon and limited to the extent of
earnings. Equity Capital Investments must not require amortization.
Equity Capital Investments may be guaranteed; however, neither Equity
Capital Investments nor such guarantee may be
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collateralized or otherwise secured. Investments classified as Debt
Securities (see Secs. 107.800 and 107.815) are not precluded from
qualifying as Equity Capital Investments.
Equity Securities has the meaning set forth in Sec. 107.800.
Financing or Financed means outstanding financial assistance
provided to a Small Business by a Licensee, whether through:
(1) Loans;
(2) Debt Securities;
(3) Equity Securities;
(4) Guarantees; or
(5) Purchases of securities of a Small Business through or from an
underwriter (see Sec. 107.825).
Guaranty Agreement means the contract entered into by SBA which is
a guarantee backed by the full faith and credit of the United States
Government as to timely payment of principal and interest on Debentures
or the Redemption Price of and Prioritized Payments on Participating
Securities and SBA's rights in connection with such guarantee.
Includible Non-Cash Gains means those non-cash gains (as reported
on SBA Form 468) that are realized in the form of Publicly Traded and
Marketable securities or investment grade debt instruments. For
purposes of this definition, investment grade debt instruments means
those instruments that are rated ``BBB'' or ``Baa'', or better, by
Standard & Poor's Corporation or Moody's Investors Service,
respectively. Non-rated debt may be considered to be investment grade
if Licensee obtains a written opinion from an investment banking firm
acceptable to SBA stating that the non-rated debt instrument is
equivalent in risk to the issuer's investment grade debt.
Institutional Investor means:
(1) Entities. Any of the following entities if the entity has a net
worth (exclusive of unfunded commitments from investors) of at least $1
million, or such higher amount as is specified in paragraph (1) of this
definition. (See also Sec. 107.230(b)(4) for limitations on the amount
of an Institutional Investor's commitment that may be included in
Private Capital.)
(i) A State or National bank, trust company, savings bank, or
savings and loan association.
(ii) An insurance company.
(iii) A 1940 Act Investment Company or Business Development Company
(each as defined in the Investment Company Act of 1940, as amended (15
U.S.C. 8a-1 et seq.).
(iv) A holding company of any entity described in paragraph (1)(i),
(ii) or (iii) of this definition.
(v) An employee benefit or pension plan established for the benefit
of employees of the Federal government, any State or political
subdivision of a State, or any agency or instrumentality of such
government unit.
(vi) An employee benefit or pension plan (as defined in the
Employee Retirement Income Security Act of 1974, as amended (Pub. L.
93-406, 88 Stat. 829), excluding plans established under section 401(k)
of the Internal Revenue Code of 1986 (26 U.S.C. 401(k)), as amended).
(vii) A trust, foundation or endowment exempt from Federal income
taxation under the Internal Revenue Code of 1986, as amended.
(viii) A corporation, partnership or other entity with a net worth
(exclusive of unfunded commitments from investors) of more than $10
million.
(ix) A State, a political subdivision of a State, or an agency or
instrumentality of a State or its political subdivision.
(x) An entity whose primary purpose is to manage and invest non-
Federal funds on behalf of at least three Institutional Investors
described in paragraphs (1)(i) through (1)(ix) of this definition, each
of whom must have at least a 10 percent ownership interest in the
entity.
(xi) Any other entity that SBA determines to be an Institutional
Investor.
(2) Individuals. (i) Any of the following individuals if he/she is
also a permanent resident of the United States:
(A) An individual who is an Accredited Investor (as defined in the
Securities Act of 1933, as amended (15 U.S.C. 77a-77aa)) and whose
commitment to the Licensee is backed by a letter of credit from a State
or National bank acceptable to SBA.
(B) An individual whose personal net worth is at least $2 million
and at least ten times the amount of his or her commitment to the
Licensee. The individual's personal net worth must not include the
value of any equity in his or her most valuable residence.
(C) An individual whose personal net worth (determined in
accordance with paragraph (2)(i)(B) of this definition) is at least $10
million.
(ii) Any individual who is not a permanent resident of the United
States but who otherwise satisfies paragraph (2)(i) of this definition
provided such individual has irrevocably appointed an agent within the
United States for the service of process.
Investment Adviser/Manager means any Person who furnishes advice or
assistance with respect to operations of a Licensee under a written
contract executed in accordance with the provisions of Sec. 107.510.
Lending Institution means a concern that is operating under
regulations of a state or Federal licensing, supervising, or examining
body, or whose shares are publicly traded and listed on a recognized
stock exchange or NASDAQ and which has assets in excess of $500
million; and which, in either case, holds itself out to the public as
engaged in the making of commercial and industrial loans and whose
lending operations are not for the purpose of financing its own or an
Associates's sales or business operations.
Leverage means financial assistance provided to a Licensee by SBA,
either through the purchase or guaranty of a Licensee's Debentures or
Participating Securities, or the purchase of a Licensee's Preferred
Securities, and any other SBA financial assistance evidenced by a
security of the Licensee.
Leverageable Capital means Regulatory Capital, excluding unfunded
commitments and Qualified Non-private Funds whose source is Federal
funds.
Licensee means either a corporation (Corporate Licensee), or a
limited partnership organized pursuant to Sec. 107.160 (Partnership
Licensee), to which a license has been granted pursuant to the Act. For
certain purposes, the Entity General Partner of a Partnership Licensee
is treated as if it were a Licensee (see Sec. 107.160(b)(2)).
Loan has the meaning set forth in Sec. 107.810.
Loans and Investments means Portfolio Securities, Assets Acquired
in Liquidation of Portfolio Securities, Operating Concerns Acquired,
and Notes and Other Securities Received, as set forth in the Statement
of Financial Position of SBA Form 468.
Management Expenses has the meaning set forth in Sec. 107.520.
1940 Act Company means a Licensee which is registered under the
Investment Company Act of 1940.
1980 Act Company means a Licensee which is registered under the
Small Business Investment Incentive Act of 1980.
Original Issue Price means the price paid by the purchaser for
securities at the time of issuance.
Participating Securities means preferred stock, preferred limited
partnership interests, or similar instruments issued by Licensees,
including debentures having interest payable only to the extent of
earnings, all of which are subject to the terms set forth in
Secs. 107.1500 through 107.1590 and section 303(g) of the Act.
Partnership Licensee. See definition of Licensee in this section.
[[Page 3194]]
Payment Date means, for a Participating Securities issuer, each
February 1, May 1, August 1, and November 1 during the term of a
Participating Security.
Person means a natural person or legal entity.
Pool means an aggregation of SBA guaranteed Debentures or SBA
guaranteed Participating Securities approved by SBA.
Portfolio means the securities representing a Licensee's total
outstanding Financing of Small Businesses. It does not include idle
funds or assets acquired in liquidation of Portfolio securities.
Portfolio Concern means a Small Business Assisted by a Licensee.
Preferred Securities means nonvoting preferred stock issued to SBA
by a for-profit Section 301(d) Corporate Licensee, or securities having
similar characteristics issued by a Section 301(d) Licensee organized
as a nonprofit corporation, or nonvoting preferred limited partnership
interests issued by a Section 301(d) Partnership Licensee.
Prioritized Payments has the meaning set forth in Sec. 107.1520.
Private Capital has the meaning set forth in Sec. 107.230.
Profit Participation has the meaning set forth in
Sec. 107.1500(c)(3).
Publicly Traded and Marketable means securities that are salable
without restriction or that are salable within 12 months pursuant to
Rule 144 (17 CFR 230.144) of the Securities Act of 1933, as amended, by
the holder thereof (or in the case of an In-kind Distribution by the
distributee thereof), and are of a class which is traded on a regulated
stock exchange, or is listed in the Automated Quotation System of the
National Association of Securities Dealers (NASDAQ), or has, at a
minimum, at least two market makers as defined in the relevant sections
of the Securities Exchange Act of 1934, as amended (15 U.S.C. 77b et
seq.), and in all cases the quantity of which can be sold over a
reasonable period of time without having an adverse impact upon the
price of the stock.
Qualified Non-private Funds has the meaning set forth in
Sec. 107.230.
Redemption Price means the amount required to be paid by the
issuer, or successor to the issuer, of Preferred or Participating
Securities to repurchase such securities from the holder. The
Redemption Price shall be the Original Issue Price less any prepayments
or prior redemptions.
Regulatory Capital means:
(1) General. Regulatory Capital means Private Capital, excluding
non-cash assets contributed to a Licensee or a license applicant, and
non-cash assets purchased by a license applicant, unless such assets
have been converted to cash or have been approved by SBA for inclusion
in Regulatory Capital. For purposes of this definition, sales of
contributed non-cash assets with recourse or borrowing against such
assets shall not constitute a conversion to cash.
(2) Exclusion of questionable commitments. An investor's commitment
to a Licensee is excluded from Regulatory Capital if SBA determines
that the collectibility of the commitment is questionable.
Retained Earnings Available for Distribution means Undistributed
Net Realized Earnings less any Unrealized Depreciation on Loans and
Investments (as reported on SBA Form 468), and represents the amount
that a Licensee may distribute to investors (including SBA) as a profit
Distribution, or transfer to Private Capital.
SBA means the Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
Secondary Relative of an individual means:
(1) A grandparent, grandchild, or any other ancestor or lineal
descendent who is not a Close Relative;
(2) An uncle, aunt, nephew, niece, or first cousin; or
(3) A spouse of any person described in paragraph (1) or (2) of
this definition.
Section 301(c) Licensee has the meaning set forth in Sec. 107.100.
Section 301(d) Licensee has the meaning set forth in Sec. 107.110.
Short-term Financing means Financing for a term of less than five
years in accordance with the regulations.
SIC Manual means the latest issue of the Standard Industrial
Classification Manual, prepared by the Office of Management and Budget,
and available from the U.S. Government Printing Office, Superintendent
of Documents, P.O. Box 371954, Pittsburgh, Pa., 15250-7954.
Small Business means a small business concern as defined in section
103(5) of the Act (including its Affiliates), which for purposes of
size eligibility, meets the applicable criteria set forth in Part 121
of this chapter.
Smaller Business has the meaning set forth in Sec. 107.710.
Start-up Financing means an Equity Capital Investment in a Small
Business that--
(1) Has not had sales exceeding $3,000,000 or positive cash flow
from operations in any of its last three full fiscal years; and
(2) Was not formed to acquire any existing business, unless the
acquired business satisfies paragraphs (1) and (2) of this definition.
Temporary Debt has the meaning set forth in Sec. 107.570.
Trust means the legal entity created for the purpose of holding
guaranteed Debentures or Participating Securities and the guaranty
agreement related thereto, receiving, holding and making any related
payments, and accounting for such payments.
Trust Certificate Rate means a fixed rate determined at the time
Participating Securities are issued by the Secretary of the Treasury
taking into consideration the current average market yield on
outstanding marketable obligations of the United States with maturities
comparable to the maturities of the Trust Certificates being guaranteed
by SBA, adjusted to the nearest one-eighth of one percent.
Trust Certificates (TCs) means certificates issued by SBA, its
agent or Trustee and representing ownership of all or a fractional part
of a Trust or Pool of Debentures or Participating Securities.
Trustee means the trustee or trustees of a Trust.
Undistributed Net Realized Earnings means Undistributed Realized
Earnings less Non-cash Gains/Income, each as reported on SBA Form 468.
Unrealized Appreciation means the amount by which a Licensee's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with Licensee's
valuation policies, exceeds the cost basis thereof.
Unrealized Depreciation means the amount by which a Licensee's
valuation of each of its Loans and Investments, as determined by its
Board of Directors or General Partner(s) in accordance with Licensee's
valuation policies, is below the cost basis thereof.
Unrealized Gain (Loss) on Securities Held means the sum of the
Unrealized Appreciation and Unrealized Depreciation on all of a
Licensee's Loans and Investments, less estimated future income tax
expense or estimated realizable future income tax benefit, as
appropriate.
Venture Capital Financing has the meaning set forth in
Sec. 107.1160.
Wind-up Plan has the meaning set forth in Sec. 107.590.
Subpart C--Qualifying for an SBIC License
Organizing an SBIC
Sec. 107.100 Organizing a Section 301(c) Licensee.
Section 301(c) Licensee means a company licensed under section
301(c)
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of the Act. It may be organized as a for-profit corporation or as a
limited partnership created in accordance with the special rules of
Sec. 107.160.
Sec. 107.110 Organizing a Section 301(d) Licensee.
Section 301(d) Licensee means a company licensed under section
301(d) of the Act that may provide Assistance only to Disadvantaged
Businesses. A Section 301(d) Licensee may be organized as a for-profit
corporation, a non-profit corporation, or as a limited partnership
created in accordance with the special rules of Sec. 107.160.
Sec. 107.115 1940 Act and 1980 Act Companies.
A 1940 Act or 1980 Act Company is eligible to apply for an SBIC
license, and an existing Licensee is eligible to apply for SBA's
approval to convert to a 1940 Act or 1980 Act Company. In either case,
the 1940 Act or 1980 Act Company may elect to be taxed as a regulated
investment company under section 851 of the Internal Revenue Code of
1986, as amended (26 U.S.C. 851). However, a Licensee making such
election may make Distributions only as permitted under the applicable
sections of this part (see the definition of Retained Earnings
Available for Distribution, Sec. 107.585, and Secs. 107.1540 through
107.1580).
Sec. 107.120 Special rules for a Section 301(d) Licensee owned by
another Licensee.
A Section 301(d) Licensee may be licensed to operate as the
subsidiary of one or more Licensees (participant Licensee), with or
without non-Licensee participation, subject to the following:
(a) Application. In reviewing the license application, SBA will
consider what effect, if any, a capital contribution to the proposed
Section 301(d) Licensee will have on the participant Licensee.
(b) Participant Licensees. Each participant Licensee must propose
to own at least twenty percent of the voting securities of the proposed
Section 301(d)Licensee.
(c) Capital contribution. A subsidiary Section 301(d) Licensee must
receive capital contributions in cash, in an amount at least equal to
the minimum capital requirement under Sec. 107.210. Capital contributed
by a participant Licensee in excess of the required minimum may be in
the form of securities of a Disadvantaged Business, valued at the lower
of cost or fair value. A participant Licensee must treat its entire
capital contribution to the subsidiary as a reduction of its
Leveragable Capital. The participant Licensee's remaining Leverageable
Capital must be sufficient to support its outstanding Leverage.
(d) No transfer of Leverage. A participant Licensee may not
transfer its Leverage to a subsidiary Section 301(d) Licensee.
Sec. 107.130 Requirement for qualified management.
When applying for a license, you must show, to the satisfaction of
SBA, that your current or proposed management is qualified and has the
knowledge, experience, and capability necessary for investing in the
types of businesses contemplated by the Act, these regulations and your
business plan. You must designate at least one individual as the
official responsible for contact with SBA.
Sec. 107.140 SBA approval of initial Management Expenses.
If you plan to obtain Leverage, you must have your Management
Expenses approved by SBA at the time of licensing. (See Sec. 107.520
for the definition of Management Expenses.)
Sec. 107.150 Management and ownership diversity requirement.
You must have diversity between management and ownership in order
to be licensed, unless you do not plan to obtain Leverage. To establish
diversity, you must meet the requirements in paragraphs (a) and (b) of
this section unless SBA approves otherwise.
(a) Requirement one. You must satisfy either paragraph (a)(1) or
paragraph (a)(2)of this section.
(1) You must have at least three shareholders or limited partners,
or at least one acceptable Institutional Investor, in either case with
an aggregate ownership interest equal to at least 30 percent of your
Regulatory Capital. Such investors must not be your Associates (except
for their status as your shareholders or limited partners) or
Affiliates of any of your Associates. For purposes of this paragraph
(a)(1), the following Institutional Investors are acceptable:
(i) Entities regulated by state or Federal authorities satisfactory
to SBA;
(ii) Public or private employee pension funds;
(iii) Trusts, foundations, or endowments which are exempt from
Federal income taxation; or
(iv) Other Institutional Investors satisfactory to SBA.
(2) Your common stock or limited partnership interests are publicly
traded.
(b) Requirement two. Your shareholders or limited partners may not
delegate their voting rights to any other Person without prior SBA
approval. This restriction does not apply to:
(1) Publicly traded Licensees.
(2) Proxies given to vote at single specified meetings.
(3) Delegations of voting rights by your investors to their
investment advisors, provided such advisors are not your Associates
(except for their status as your shareholder or partner).
(c) Diversity based on Licensee's parent company. If you do not
have diversity as defined in paragraphs (a) and (b) of this section,
SBA in its sole discretion may accept diversity achieved on the same
basis through your parent company as a substitute. As used in this
paragraph (c), ``parent company'' means an entity that directly or
indirectly has an interest of more than 50 percent of your Regulatory
Capital.
(d) Requirement to maintain diversity after licensing. If you were
required to have diversity between management and ownership at the time
you were licensed, you must maintain such diversity while you have
outstanding Leverage or Earmarked Assets, unless SBA approves
otherwise. If, at any time, you no longer satisfy the diversity
criteria in paragraph (a) or (b) of this section, you must:
(1) Notify SBA within 10 days; and
(2) Re-establish diversity within six months.
(e) Exception to diversity rule. This Sec. 107.150 does not apply
if you are not licensed to issue participating securities and:
(1) You received your license before November 28, 1995; or
(2) SBA received your license application before November 28, 1995
and, as of such date, you had raised the funds needed to begin
operations as contemplated in your business plan.
Sec. 107.160 Special rules for Licensees formed as limited
partnerships.
A limited partnership organized under State law solely for the
purpose of performing the functions and conducting the activities
contemplated under the Act may apply for a license under section 301(c)
or section 301 (d) of the Act (``Partnership Licensee'').
(a) Number of Licensee's General Partners. If you are a Partnership
Licensee, you must have as your general partner(s) at least two
individuals, or at least one corporation, partnership, or limited
liability company (LLC), or any combination of individuals,
corporations, partnerships, or LLCs.
(b) Entity General Partner of Licensee. A general partner which is
a corporation, limited liability company or partnership (an ``Entity
General
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Partner'') shall be organized under state law solely for the purpose of
serving as the general partner of one or more Licensees.
(1) SBA must approve any person who will serve as an officer,
director, manager, or general partner of the Entity General Partner.
This provision must be stated in an Entity General Partner's
Certificate of Incorporation, member agreement, Limited Partnership
Agreement or other similar governing instrument which must, in each
case, accompany the license application.
(2) An Entity General Partner is subject to the same examination
and reporting requirements as a Licensee under section 310(b) of the
Act. The restrictions and obligations imposed upon a Licensee by
Secs. 107.1800 through 107.1820, and 107.30, 107.410 through 107.450,
107.470, 107.475, 107.500, 107.510, 107.585, 107.600, 107.680, 107.690
through 107.692, 107.865, and 107.1910 apply also to an Entity General
Partner of a Licensee.
(3) The general partner(s) of your Entity General Partner(s) will
be considered your general partner.
(4) If your Entity General Partner is a limited partnership, its
limited partners may be considered your Control Person(s) if they meet
the definition for Control Person in Sec. 107.50.
(5) If your Entity General Partner is a limited partnership, it is
subject to paragraph (a) of this section.
(c) Other requirements for Partnership Licensees. If you are a
Partnership Licensee:
(1) You must have a minimum duration of ten years or two years
following the maturity of your last-maturing Leverage security,
whichever is longer. After 10 years, if all Leverage has been repaid or
redeemed and all amounts due SBA, its agent, or Trustee have been paid,
the Partnership Licensee may be terminated by a vote of your partners.
(For purposes of this provision SBA is not considered a partner.);
(2) None of your general partner(s) may be removed or replaced by
your limited partners without prior written approval of SBA;
(3) Any transferee of, or successor in interest to, your general
partner shall have only the rights and liabilities of a limited partner
pending SBA's written approval of such transfer or succession; and
(4) You must incorporate all the provisions in this paragraph (c)
in your Limited Partnership Agreement.
(d) Obligations of a Control Person. All Control Persons are bound
by the disciplinary provisions of sections 313 and 314 of the Act and
by the conflict-of-interest rules under section 312 of the Act. The
term Licensee, as used in Secs. 107.30, 107.460, and 107.680 includes
all of the Licensee's Control Persons. The term Licensee as used in
Sec. 107.670 includes only the Licensee's general partner(s). The
conditions specified in Secs. 107.1800 through 107.1820 and
Sec. 107.1910 apply to all general partners.
(e) Liability of general partner for partnership debts to SBA.
Subject to section 314 of the Act, your general partner is not liable
solely by reason of its status as a general partner for repayment of
any Leverage or debts you owe to SBA unless SBA, in the exercise of
reasonable investment prudence, and with regard to your financial
soundness, determines otherwise prior to the purchase or guaranty of
your Leverage.
(f) Reorganization of Licensee. A corporate Licensee wishing to
reorganize as a Partnership Licensee, or a Partnership Licensee wishing
to reorganize as a Corporate Licensee, may apply to SBA for approval
under Sec. 107.470.
(g) Special Leverage requirement. Before your first issuance of
Leverage, you must furnish SBA with evidence that you qualify as a
partnership for tax purposes, either by a ruling from the Internal
Revenue Service, or by an opinion of counsel.
Capitalizing an SBIC
Sec. 107.200 Adequate capital for Licensees.
You must meet the requirements of this Sec. 107.200 to qualify for
a license, to continue as a Licensee, and to receive Leverage.
(a) You must have enough Regulatory Capital to provide reasonable
assurance that:
(1) You will operate soundly and profitably over the long term; and
(2) You will be able to operate actively in accordance with your
Articles and within the context of your business plan, as approved by
SBA.
(b) In SBA's sole discretion, you must be economically viable,
taking into consideration actual and anticipated income and losses on
your Loans and Investments, and the experience and qualifications of
your owners and managers.
Sec. 107.210 Minimum capital requirements for Licensees.
(a) Minimum capital for Section 301(c) Licensees--general rule. A
Section 301(c) Licensee or applicant must have Regulatory Capital
(excluding commitments from your investors) of at least $2,500,000.
(b) Minimum capital for Section 301(d) Licensees--general rule. A
Section 301(d) Licensee or applicant must have Regulatory Capital
(excluding commitments from your investors) of at least $1,500,000.
(c) Exception to general rule--grandfather clause. The minimum
capital requirements in paragraphs (a) and (b) of this section do not
apply if you were licensed before October 2, 1990, or if SBA had your
license application on file before October 2, 1990 and granted you a
license on the basis of such application. If you qualify for this
exception, you must have at least the minimum Private Capital required
by the regulations in effect on October 1, 1990.
(d) Additional capital requirements for Licensees seeking Leverage.
If you are a license applicant who intends to seek Leverage, see
Sec. 107.220.
Sec. 107.220 Special minimum capital requirements for Licensees
issuing Leverage.
(a) Participating Securities. You must have Regulatory Capital of
at least $10,000,000 in order to apply for Participating Securities,
unless you demonstrate to SBA's satisfaction that you can be
financially viable over the long term with a lower amount. You are not
permitted under any circumstances to apply for Participating Securities
if your Regulatory Capital is less than $5,000,000.
(b) Debentures. If you are licensed after January 31, 1996, you
must have Regulatory Capital of at least $5,000,000 in order to apply
for Debentures, unless you demonstrate to SBA's satisfaction that you
can be financially viable over the long term with a lower amount.
(c) Companies licensed before October 2, 1990. If Sec. 107.210(c)
applies to you and your Regulatory Capital (excluding commitments from
investors) is below $2,500,000 (for a Section 301(c) Licensee) or
$1,500,000 (for a Section 301(d) Licensee):
(1) You are eligible for Leverage (other than refinancing) only if
you can demonstrate to SBA's satisfaction that you have been profitable
for three out of your last four fiscal years before applying for
Leverage and, on the average, have been profitable for all such fiscal
years.
(2) Even if you do not satisfy paragraph (c)(1) of this section,
you may apply for Leverage needed to refinance any Debenture
outstanding on October 2, 1990, one time only, for a term to be
determined by SBA.
Sec. 107.230 Permitted sources of Private Capital for Licensees.
Private Capital means the contributed capital of a Licensee, plus
unfunded
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binding commitments by Institutional Investors (including commitments
evidenced by a promissory note) to contribute capital to a Licensee.
(a) Contributed capital. For purposes of this section, contributed
capital means the paid-in capital and paid-in surplus of a Corporate
Licensee, or the partners' contributed capital of a Partnership
Licensee, in either case subject to the limitations in paragraph (b) of
this section.
(b) Exclusions from Private Capital. Private Capital does not
include:
(1) Funds borrowed by a Licensee from any source.
(2) Funds obtained through the issuance of Leverage.
(3) Funds obtained directly or indirectly from any Federal, State,
or local government, or any government agency or instrumentality,
except for funds invested by a public pension fund and ``Qualified Non-
private Funds'' as defined in paragraph (d) of this section.
(4) Any portion of a commitment from an Institutional Investor with
a net worth of less than $10 million that exceeds 10 percent of such
Institutional Investor's net worth and is not backed by a letter of
credit from a State or National bank acceptable to SBA.
(c) Non-cash capital contributions. Capital contributions in a form
other than cash are subject to the limitations in Sec. 107.240.
(d) Qualified Non-private Funds. Private Capital includes
``Qualified Non-private Funds'' as defined in this paragraph (d);
however, investors of Qualified Non-private Funds must not control,
directly or indirectly, a Licensee's management, or its board of
directors or general partner(s). Qualified Non-private Funds are:
(1) Funds directly or indirectly invested in any Licensee on or
before August 16, 1982 by any Federal agency except SBA, under a
statute explicitly mandating the inclusion of such funds in ``Private
Capital'';
(2) Funds directly or indirectly invested in any Licensee by any
Federal agency under a statute that is enacted after September 4, 1992,
explicitly mandating the inclusion of such funds in ``Private
Capital'';
(3) Funds invested in any Licensee or license applicant by one or
more State or local government entities (including any guarantee
extended by such entities) in an aggregate amount that does not exceed
33 percent of Regulatory Capital; and
(4) Funds invested in any Section 301(d) Licensee or such license
applicant from the following sources:
(i) A State financing agency, or similar agency or instrumentality,
if the funds invested are derived from such agency's net income and not
from appropriated State or local funds; and
(ii) Grants made by a state or local government agency or
instrumentality into a nonprofit corporation or institution exercising
discretionary authority with respect to such funds, if SBA determines
that such funds have taken on a private character and the nonprofit
corporation or institution is not a mere conduit.
(e) You may not accept any capital contribution made with funds
borrowed by a Person seeking to own an equity interest (whether direct
or indirect, beneficial or of record) of at least 10 percent of your
Private Capital. This exclusion does not apply if:
(1) Such Person's net worth is at least twice the amount borrowed;
or
(2) SBA gives its prior written approval of the capital
contribution.
Sec. 107.240 Limitations on including non-cash capital contributions
in Private Capital.
Non-cash capital contributions to a Licensee or license applicant
are included in Private Capital only if they fall into one of the
following categories:
(a) Direct obligations of, or obligations guaranteed as to
principal and interest by, the United States.
(b) Services rendered or to be rendered to you, priced at no more
than their fair market value.
(c) Tangible assets used in your operations, priced at no more than
their fair market value.
(d) Shares in a Disadvantaged Business received by a subsidiary
Section 301(d) Licensee from its parent Licensee, valued at the lower
of cost or fair value.
(e) Other non-cash assets approved by SBA.
Sec. 107.250 Exclusion of stock options issued by Licensee from
Management Expenses.
Stock options issued by any Licensee, including a 1940 or 1980 Act
Company, are not considered compensation and therefore do not count as
part of a Licensee's Management Expenses.
Applying for an SBIC License
Sec. 107.300 License application form and fee.
The license application must be submitted on SBA Form 415 together
with a processing fee computed as follows:
(a) All license applicants will pay a base fee of $10,000.
(b) All applicants who will be Partnership Licensees will pay an
additional $5,000 fee, for a total of $15,000.
(c) All applicants who will be issuing Participating Securities
will pay an additional $5,000 fee, for a total of $15,000, or a total
fee of $20,000 if they also intend to be Partnership Licensees.
Subpart D--Changes in Ownership, Control, or Structure of Licensee;
Transfer of License
Changes in Control or Ownership of Licensee
Sec. 107.400 Changes in ownership of 10 percent or more of Licensee
but no change of Control.
(a) Prior approval requirements. You must obtain SBA's prior
written approval for any proposed transfer or issuance of ownership
interests that results in the ownership (beneficial or of record) by
any Person, or group of Persons acting in concert, of at least 10
percent of any class of your stock or partnership capital.
(b) Fee. A processing fee of $200 must accompany each such request
for approval of a change of ownership.
Sec. 107.410 Changes in Control of Licensee (through change in
ownership or otherwise).
(a) Prior approval requirements. You must obtain SBAs prior
written approval for any proposed transaction or event that results in
Control by any Person(s) not previously approved by SBA.
(b) Fee. A processing fee of $10,000 must accompany any application
for approval of one or more transactions or events that will result in
a transfer of Control.
Sec. 107.420 Prohibition on exercise of ownership or Control rights in
Licensee before SBA approval.
Without prior written SBA approval, no change of ownership or
Control may take effect and no officer, director, employee or other
Person acting on your behalf shall:
(a) Register on your books any transfer of ownership interest to
the proposed new owner(s);
(b) Permit the proposed new owner(s) to exercise voting rights with
respect to such ownership interest (including directly or indirectly
procuring or voting any proxy, consent or authorization as to such
voting rights at any shareholders' or partnership meeting);
(c) Permit the proposed new owner(s) to participate in any manner
in the conduct of your affairs (including exercising control over your
books, records, funds or other assets; participating directly or
indirectly in any disposition thereof; or serving as an
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officer, director, partner, employee or agent); or
(d) Allow ownership or Control to pass to another Person.
Sec. 107.430 Notification to SBA of transactions that may change
ownership or Control.
You must promptly notify SBA as soon as you have knowledge of
transactions or events that may result in a transfer of Control or
ownership of at least 10 percent of your capital. If there is any doubt
as to whether a particular transaction or event will result in such a
change, report the facts to SBA.
Sec. 107.440 Standards governing prior SBA approval for a proposed
transfer of Control.
SBA approval is contingent upon full disclosure of the real parties
in interest, the source of funds for the new owners' interest, and
other data requested by SBA. As a condition of approving a proposed
transfer of control, SBA may:
(a) Require an increase in your Regulatory Capital;
(b) Require the new owners or the transferee's Control Person(s) to
assume, in writing, personal liability for your Leverage, effective
only in the event of their direct or indirect participation in any
transfer of Control not approved by SBA; or
(c) Require compliance with any other conditions set by SBA.
Sec. 107.450 Notification to SBA of pledge of Licensee's shares.
(a) You must notify SBA in writing, within 30 calendar days, of the
terms of any transaction in which:
(1) Any Person, or group of Persons acting in concert, pledges
shares of your stock (or equivalent ownership interests) as collateral
for indebtedness; and
(2) The shares pledged are at least 10 percent of your Regulatory
Capital.
(b) If the transaction creates a change of ownership or Control,
you must comply with Sec. 107.400 or Sec. 107.410, as appropriate.
Restrictions on Common Control or Ownership of Two or More Licensees
Sec. 107.460 Restrictions on Common Control or ownership of two (or
more) Licensees.
(a) General rule. Without SBA's prior written approval, you must
not have an officer, director, manager, Control Person, or owner (with
a direct or indirect ownership interest of at least 10 percent) who is
also:
(1) An officer, director, manager, Control Person, or owner (with a
direct or indirect ownership interest of at least 10 percent) of
another Licensee; or
(2) An officer or director of any Person that directly or
indirectly controls, or is controlled by, or is under Common Control
with, another Licensee.
(b) Exceptions to general rule. This Sec. 107.460 does not apply
to:
(1) Common officers, directors, managers, or owners of a Section
301(c) Licensee and its Section 301(d) subsidiary; or
(2) Common officers, directors, managers, Control Persons, or
owners of two (or more) Licensees which have no Leverage.
Change in Structure of Licensee
Sec. 107.470 SBA approval of merger, consolidation, or reorganization
of Licensee.
(a) Prior approval requirements. You may not merge, consolidate,
change form of organization (corporation or partnership) or reorganize
without SBA's prior written approval. Any such merger or consolidation
will be subject to Sec. 107.440.
(b) Fee. A processing fee of $5,000 must accompany any application
for approval of a change in your form of organization (from corporation
to partnership or partnership to corporation).
Transfer of License
Sec. 107.475 Transfer of license.
You may not transfer your license in any manner without SBA's prior
written approval.
Subpart E--Managing the Operations of a Licensee
General Requirements
Sec. 107.500 Lawful operations under the Act.
You must engage only in the activities contemplated by the Act and
in no other activities.
Sec. 107.501 Identification as a Licensee.
You must display your SBIC license in a prominent location. You
must also have a listed telephone number. Before collecting an
application fee or extending Financing to a Small Business, you must
obtain a written statement from the concern acknowledging its awareness
that you are ``a Federal licensee under the Small Business Investment
Act of 1958, as amended.''
Sec. 107.502 Representations to the public.
You may not represent or imply to anyone that the SBA, the U.S.
Government or any of its agencies or officers has approved any
ownership interests you have issued or obligations you have incurred.
Be certain to include a statement to this effect in any solicitation to
investors. Example: You may not represent or imply that ``SBA stands
behind the Licensee'' or that ``Your capital is safe because SBA's
experts review proposed investments to make sure they are safe for the
Licensee.''
Sec. 107.503 Licensee's adoption of an approved Valuation Policy.
(a) SBA approval. You must have a written valuation policy for use
in determining the value of your Loans and Investments. You must
include this policy as part of your initial application to SBA.
(b) Adopting SBA's valuation guidelines/automatic approval. If you
adopt the exact wording of the Model Valuation Policy, ``Valuation
Guidelines for SBICs'', and make absolutely no additions or changes,
then SBA will automatically accept your Valuation Policy. With SBA's
prior written approval, you may adopt a policy that differs from the
model.
(c) Licensee's adoption of policy. Your board of directors or
general partners will be solely responsible for adopting your Valuation
Policy and for using it to prepare valuations of your Loans and
Investments for submission to SBA. If SBA reasonably believes that your
valuations, individually or in the aggregate, are materially misstated,
it reserves the right to require you to engage, at your expense, an
independent third party, acceptable to SBA, to substantiate the
valuations.
(d) Frequency of valuations. (1) If you have outstanding Leverage
or Earmarked Assets, you must value your Loans and Investments at the
end of the second quarter of your fiscal year, and at the end of your
fiscal year.
(2) Otherwise, you must value your Loans and Investments only at
your fiscal year end.
(3) On a case-by-case basis, SBA may require you to perform
valuations more frequently.
(4) You must report material adverse changes in valuations at least
quarterly, within thirty days following the close of the quarter.
(e) Review of valuations by independent public accountant. Your
independent public accountant must review only valuations performed as
of the end of your fiscal year. The accountant's responsibility
includes reviewing your valuation procedures and the implementation of
such procedures, including adequacy of documentation. The accountant
also has reporting responsibilities concerning the results of this
review.
[[Page 3199]]
Sec. 107.504 Computer capability requirements of Licensee.
You must have a personal computer with a modem, and be able to use
this equipment to prepare reports (using SBA-provided software) and
transmit them by modem to SBA.
Sec. 107.505 Facsimile requirement.
You must be able to receive fax messages 24 hours per day at your
primary office.
Sec. 107.506 Safeguarding Licensee's assets/Internal controls.
You must adopt a plan to safeguard your assets and monitor the
reliability of your financial data, personnel, Portfolio, funds and
equipment. You must provide your bank and custodian with a certified
copy of your resolution or other formal document describing your
control procedures.
Sec. 107.507 Violations based on false filings and nonperformance of
agreements with SBA.
The following shall constitute a violation of this part:
(a) Nonperformance. Nonperformance of any of the requirements of
any Debenture, Participating Security or Preferred Security, or of any
written agreement with SBA.
(b) False statement. In any document submitted to SBA:
(1) Any false statement knowingly made; or
(2) Any misrepresentation of a material fact; or
(3) Any failure to state a material fact. A material fact is any
fact which is necessary to make a statement not misleading in light of
the circumstances under which the statement was made.
Sec. 107.508 Accessible office.
You must maintain an office that is convenient to the public and is
open for business during normal working hours.
Sec. 107.509 Employment of SBA officials.
Without SBA's prior written approval, for a period of two years
after the date of your most recent issuance of Leverage (or the receipt
of any SBA Assistance as defined in part 105 of this chapter), you are
not permitted to employ, offer employment to, or retain for
professional services, any person who:
(a) Served as an officer, attorney, agent, or employee of SBA on or
within one year before such date; and
(b) As such, occupied a position or engaged in activities which, in
SBA's determination, involved discretion with respect to the granting
of Assistance under the Act.
Management and Compensation
Sec. 107.510 SBA approval of Licensee's Investment Adviser/Manager.
You may employ an Investment Adviser/Manager who will be subject to
the supervision of your board of directors or general partner. If you
have Leverage or plan to seek Leverage, you must obtain SBA's prior
written approval of the management contract. SBA's approval of an
Investment/Advisor Manager for one Licensee does not indicate approval
of that manager for any other Licensee.
(a) Management contract. The contract must:
(1) Specify the services the Investment Adviser/manager will render
to you and to the Small Businesses in your Portfolio; and
(2) Indicate the basis for computing Management Expenses.
(b) Material change to approved management contract. If there is a
material change, both you and SBA must approve such change in advance.
If you are uncertain if the change is material, submit the proposed
revision to SBA.
Sec. 107.520 Management Expenses of a Licensee.
SBA must approve any increases in your Management Expenses if you
have outstanding Leverage or Earmarked Assets.
(a) Definition of Management Expenses. Management Expenses include:
(1) Salaries;
(2) Office expenses;
(3) Travel;
(4) Business development;
(5) Office and equipment rental;
(6) Bookkeeping; and
(7) Expenses related to developing, investigating and monitoring
investments.
(b) Management Expenses do not include services provided by
specialized outside consultants, outside lawyers and independent public
accountants, if they perform services not generally performed by a
venture capital company.
(c) If your Management Expenses have not already been approved by
SBA, you must submit such expenses for approval with your SBA Form 468
for your first fiscal year ending after January 31, 1996.
Cash Management by a Licensee
Sec. 107.530 Restrictions on investments of idle funds by leveraged
Licensees.
(a) Applicability of this section. This Sec. 107.530 applies if you
have outstanding Leverage or if you have applied for Leverage.
(b) Permitted investments of idle funds. Funds not invested in
Small Businesses must be maintained in:
(1) Direct obligations of, or obligations guaranteed as to
principal and interest by, the United States, which mature within 15
months from the date of the investment; or
(2) Repurchase agreements with federally insured institutions, with
a maturity of seven days or less. The securities underlying the
repurchase agreements must be direct obligations of, or obligations
guaranteed as to principal and interest by, the United States. The
securities must be maintained in a custodial account at a federally
insured institution; or
(3) Certificates of deposit with a maturity of one year or less,
issued by a federally insured institution; or
(4) A deposit account in a federally insured institution, subject
to a withdrawal restriction of one year or less; or
(5) A checking account in a federally insured institution; or
(6) A reasonable petty cash fund.
(c) Deposit of funds in excess of the insured amount. (1) You are
permitted to deposit funds in a federally insured institution in excess
of the institution's insured amount, but only if the institution is
``well capitalized'' in accordance with the definition set forth in
regulations of the Federal Deposit Insurance Corporation, as amended
(12 CFR 325.103).
(2) Exception: You may make a temporary deposit (not to exceed 30
days) in excess of the insured amount, in a transfer account
established to facilitate the receipt and disbursement of funds or to
hold funds necessary to honor Commitments issued.
(d) Deposit of funds in Associate institution. A deposit in, or a
repurchase agreement with, a federally insured institution that is your
Associate is not considered a Financing of such Associate under
Sec. 107.730, provided the terms of such deposit or repurchase
agreement are no less favorable than those available to the general
public.
Borrowing by Licensees From Non-SBA Sources
Sec. 107.550 Prior approval of secured third-party debt of leveraged
Licensees.
(a) Definition. In this Sec. 107.550, ``secured third-party debt''
means any non-SBA debt secured by any of your assets, including secured
guarantees and other contingent obligations that you voluntarily
assume, secured lines of credit, and secured Temporary Debt of a
Licensee with outstanding Participating Securities.
[[Page 3200]]
(b) General rule. If you have outstanding Leverage, you must get
SBA's written approval before you incur any secured third-party debt or
refinance any debt with secured third-party debt, including any renewal
of a secured line of credit, increase in the maximum amount available
under a secured line of credit, or expansion of the scope of a security
interest or lien. For purposes of this paragraph (b), ``expansion of
the scope of a security interest or lien'' does not include the
substitution of one asset or group of assets for another, provided the
asset values (as reported on your most recent annual Form 468) are
comparable.
(c) Additional rule for secured lines of credit in existence on
April 8, 1994. If you have outstanding Leverage and you have a secured
line of credit that was created on or before April 8, 1994, you must
receive SBA's written approval of the line before you increase the
amounts outstanding thereunder.
(d) Conditions for SBA approval. As a condition of granting its
approval under this Sec. 107.550, SBA may impose such restrictions or
limitations as it deems appropriate, taking into account your
historical performance, current financial position, proposed terms of
the secured debt and amount of aggregate debt you will have outstanding
(including Leverage). SBA will not favorably consider any requests for
approval which include a blanket lien on all your assets, or a security
interest in your investor commitments in excess of 125 percent of the
proposed borrowing.
(e) Thirty day approval. Unless SBA notifies you otherwise within
30 days after it receives your request, you may consider your request
automatically approved if:
(1) You are in regulatory compliance;
(2) The security interest in your assets is limited to either those
assets being acquired with the borrowed funds or an asset coverage
ratio of no more than 2:1;
(3) Your Leverage does not exceed 150 percent of your Leverageable
Capital; and
(4) Your request is for approval of a secured line of credit that
would not cause your total outstanding borrowings (not including
Leverage) to exceed 50 percent of your Leverageable Capital.
Sec. 107.560 Subordination of SBA's creditor position.
(a) Debentures purchased or guaranteed on or before July 1, 1991.
Under the terms of any Debenture purchased or guaranteed by SBA on or
before July 1, 1991, SBA's unsecured claims against you, as a
Debenture-holder or as subrogee, are subordinated in favor of all your
other creditors, except to the extent that such claims may be subject
to equitable subordination in SBA's favor.
(b) Debentures purchased or guaranteed after July 1, 1991,
including refinancings of Debentures previously purchased or
guaranteed. (1) Under the terms of any Debenture purchased or
guaranteed by SBA after July 1, 1991, SBA's unsecured claims against
you, as a Debenture-holder or as subrogee, are subordinated only in
favor of non-Associate lenders; and, to the extent that your
indebtedness to such lenders exceeds the lesser of $10,000,000 or 200
percent of your Regulatory Capital (determined as of the date your
Debentures were purchased or guaranteed), SBA's unsecured claims enjoy
parity with those of other unsecured creditors, except with respect to
indebtedness created on or before July 1, 1991.
(2) In order to induce others to lend you money after your
Debenture has been purchased or guaranteed, SBA may agree in writing on
a case-by-case basis to subordinate its unsecured claims, on such terms
as it may determine, in favor of one or more of your Associates, or in
favor of other lenders in excess of the amounts mentioned in paragraph
(b)(1) of this section.
(3) SBA reserves the authority to refuse to subordinate its claims
if it determines, at the time you request your Debenture be purchased
or guar
FR Doc. 96-1351 PART 107SMALL BUSINESS INVESTMENT COMPANIES
anteed, that the exercise of reasonable investment prudence and
your financial condition warrant such refusal.
Sec. 107.570 Restrictions on third-party debt of issuers of
Participating Securities.
(a) General. Temporary Debt is the only debt (other than Leverage)
that you are permitted to incur if you have applied to issue
Participating Securities or if you have outstanding Participating
Securities. For additional rules governing secured Temporary Debt, see
Sec. 107.550.
(b) Definition of Temporary Debt. Temporary Debt means your short-
term borrowings if:
(1) Such borrowings are for the purpose of maintaining your
operating liquidity or providing funds for a particular Financing of a
Small Business;
(2) The funds are borrowed from a regulated financial institution
or a regulated credit company (or, if approved by SBA on a case-by-case
basis, from non-regulated lenders including shareholders or partners);
(3) Your total outstanding borrowings (not including Leverage) do
not exceed 50 percent of your Leverageable Capital; and
(4) All such borrowings are fully paid off for at least 30
consecutive days during your fiscal year so that you have no
outstanding third-party debt for 30 days.
Voluntary Decrease in Licensee's Regulatory Capital
Sec. 107.585 Voluntary decrease in Licensee's Regulatory Capital.
You must obtain SBA's prior written approval to reduce your
Regulatory Capital by more than two percent in any fiscal year, unless
otherwise permitted under Secs. 107.1560 and 107.1570. At all times,
you must retain sufficient Regulatory Capital to meet the minimum
capital requirements in the Act and Sec. 107.210, and sufficient
Leverageable Capital to avoid having excess Leverage in violation of
section 303 of the Act and Secs. 107.1150 through 107.1170.
Requirement To Conduct Active Investment Operations
Sec. 107.590 Licensee's requirement to maintain active operations.
(a) Activity test. You must conduct active operations, as
determined under this Sec. 107.590, as a condition of your license. You
will be considered active if:
(1) During the eighteen months preceding your most recent fiscal
year end, you made Financings totaling at least 20 percent of your
Regulatory Capital; or
(2) Your idle funds did not exceed 20 percent of your total assets
(at cost) at your most recent fiscal year end.
(b) Permitted exceptions to activity requirements. You are
considered active if your failure to meet the requirements in paragraph
(a) of this section is the result of one or more of the following
factors:
(1) Your excess idle funds are the result of the receipt, within
the previous nine months, of realized gains, repayments, additional
capital contributions, or Leverage.
(2) It is necessary for you to maintain excess idle funds to
conduct your operations because:
(i) Your unfunded commitments from investors are no more than 20
percent of your Regulatory Capital; and
(ii) You cannot receive additional Leverage, solely because SBA has
insufficient funds available.
(3) You have not made sufficient Financings because of a lack of
available funds, evidenced by Loans and Investments (at cost) equal to
at least 90 percent of your Combined Capital as of your most recent
fiscal year end.
(4) You have not made sufficient Financings solely because SBA has
[[Page 3201]]
restricted your ability to make investments.
(c) Applicability of activity requirements. The activity
requirements in paragraph (a) of this section do not apply if you have
filed a ``Wind-up Plan'' approved by SBA. ``Wind-up Plan'' means a plan
that you prepare when you decide that you will no longer make any
Financings other than follow-on investments, and that you update
annually when you file your SBA Form 468. The plan must contain your
best estimates of the following:
(1) The remaining number of years you expect to operate.
(2) For each of your Loans and Investments, the expected
liquidation date and anticipated proceeds.
(3) The timing of your repayment of obligations to SBA.
(4) The timing and amount of any planned reductions in your
Management Expenses.
(d) Phase-in of activity requirements. (1) General rule. You must
meet the activity requirements in this Sec. 107.590 as of the end of
your first full fiscal year beginning after January 31, 1996. Until
then, you will be considered active if you meet the activity
requirements in effect on January 30, 1996.
(2) Rule for new Licensees. If you received your license after
January 31, 1996, or if you received your license less than eighteen
months before the fiscal year end determined under paragraph (d)(1) of
this section, you must meet the activity requirements in this
Sec. 107.590 as of the end of your second full fiscal year beginning
after the date you received your license.
Subpart F--Recordkeeping, Reporting, and Examination Requirements
for Licensees
Recordkeeping Requirements for Licensees
Sec. 107.600 General requirement for Licensee to maintain and preserve
records.
(a) Maintaining your accounting records. You must establish and
maintain your accounting records using SBA's standard chart of accounts
for Licensees, unless SBA approves otherwise.
(b) Location of records. You must keep the following records at
your principal place of business or, in the case of paragraph (b)(3) of
this section, at the branch office that is primarily responsible for
the transaction:
(1) All your accounting and other financial records;
(2) All minutes of meetings of directors, stockholders, executive
committees, partners, or other officials; and
(3) All documents and supporting materials related to your business
transactions, except for any items held by a custodian under a written
agreement between you and a Portfolio Concern or non-SBA lender, or any
securities held in a safe deposit box, or by a licensed securities
broker in an amount not exceeding the broker's per-account insurance
coverage.
(c) Preservation of records. You must retain all the records that
are the basis for your financial reports. Such records must be
preserved for the periods specified in this paragraph (c), and must
remain accessible for the first two years of the preservation period.
(1) You must preserve for at least 15 years or, in the case of a
Partnership Licensee, at least two years beyond the date of
liquidation:
(i) All your accounting ledgers and journals, and any other records
of assets, asset valuations, liabilities, equity, income, and expenses.
(ii) Your Articles, bylaws, minute books, and license application.
(iii) All documents evidencing ownership of the Licensee including
ownership ledgers, and ownership transfer registers.
(2) You must preserve for at least six years all supporting
documentation (such as vouchers, bank statements, or canceled checks)
for the records listed in paragraph (b)(1) of this section.
(3) After final disposition of any item in your Portfolio, you must
preserve for at least six years:
(i) Financing applications and Financing instruments.
(ii) All loan, participation, and escrow agreements.
(iii) Size status declarations (SBA Form 480) and Financing
Eligibility Statements (SBA Form 1941).
(iv) Any capital stock certificates and warrants of the Portfolio
Concern that you did not surrender or exercise.
(v) All other documents and supporting material relating to the
Portfolio Concern, including correspondence.
(4) You may substitute a microfilm or computer-scanned or generated
copy for the original of any record covered by this paragraph (c).
Sec. 107.610 Required certifications for Loans and Investments.
For each of your Loans and Investments, you must have the documents
listed in this section. You must keep these documents in your files and
make them available to SBA upon request.
(a) SBA Form 480, the Size Status Declaration, executed both by you
and by the concern you are financing. By executing this document, both
parties certify that the concern is a Small Business. For securities
purchased from an underwriter in a public offering, you may substitute
a prospectus showing that the concern is a Small Business.
(b) SBA Form 652, a certification by the concern you are financing
that it will not illegally discriminate (see part 112 of this chapter).
(c) SBA Form 1941 (for Section 301(d) Licensees only), executed
both by you and by the concern you are financing. By executing this
document, both parties certify that the concern is a Disadvantaged
Business.
(d) A certification by the concern you are financing of the
intended use of the proceeds. For securities purchased from an
underwriter in a public offering, you may substitute a prospectus
indicating the intended use of proceeds.
Sec. 107.620 Requirements to obtain information from Portfolio
Concerns.
All the information required by this section is subject to the
requirements of Sec. 107.600 and must be in English.
(a) Information for initial Financing decision. Before extending
any Financing, you must require the applicant to submit such financial
statements, plans of operation (including intended use of financing
proceeds), cash flow analyses and projections as are necessary to
support your investment decision. The information submitted must be
consistent with the size and type of the business and the amount of the
proposed Financing.
(b) Updated financial information. (1) The terms of each Financing
must require the Portfolio Concern to provide, at least annually,
sufficient financial information to enable you to perform the following
required procedures:
(i) Evaluate the financial condition of the Portfolio Concern for
the purpose of valuing your investment;
(ii) Determine the continued eligibility of the Portfolio Concern;
and
(iii) Verify the use of Financing proceeds.
(2) The information submitted to you must be certified by the
president, chief executive officer, treasurer, chief financial officer,
general partner, or proprietor of the Portfolio Concern.
(3) For financial and valuation purposes, you may accept a complete
copy of the Federal income tax return filed by the Portfolio Concern
(or its proprietor) in lieu of financial statements, but only if
appropriate for the size and type of the business involved.
(4) The requirements in this paragraph (b) do not apply when you
[[Page 3202]]
acquire securities from an underwriter in a public offering (see
Sec. 107.825). In that case, you must keep copies of all reports
furnished by the Portfolio Concern to the holders of its securities.
(c) Information required for examination purposes. You must obtain
any information requested by SBA's examiners for the purpose of
verifying the certifications made by a Portfolio Concern under
Sec. 107.610. In this regard, your Financing documents must contain
provisions requiring the Portfolio Concern to give you and/or SBA's
examiners access to its books and records for such purpose.
Reporting Requirements for Licensees
Sec. 107.630 Requirement for Licensees to file financial statements
with SBA (Form 468).
(a) Annual filing of Form 468. For each fiscal year, you must
submit to SBA financial statements and supplementary information
prepared on SBA Form 468. You must file Form 468 on or before the last
day of the third month following the end of your fiscal year, except
for the information required under paragraph (e) of this section, which
must be filed on or before the last day of the fifth month following
the end of your fiscal year.
(1) Audit of Form 468. The annual Form 468 must be audited by an
independent public accountant acceptable to SBA.
(2) Insurance requirement for public accountant. Unless SBA
approves otherwise, your independent public accountant must carry at
least $1,000,000 of Errors and Omissions insurance, or be self-insured
and have a net worth of at least $1,000,000.
(b) Interim filings of Form 468. When requested by SBA, you must
file interim reports on Form 468. SBA may require you to file the
entire form or only certain statements and schedules. You must file
such reports on or before the last day of the month following the end
of the reporting period. If you have an outstanding Leverage commitment
from SBA, see the filing requirements in Sec. 107.1220.
(c) Standards for preparation of Form 468. You must prepare SBA
Form 468 in accordance with SBA's Accounting Standards and Financial
Reporting Requirements for Small Business Investment Companies.
(d) Where to file Form 468. Submit all filings of Form 468 to the
Investment Division of SBA.
(e) Reporting of economic impact information on Form 468. Your
annual filing of SBA Form 468 must include an assessment of the
economic impact of each Financing, specifying the full-time equivalent
jobs created or retained, and the impact of the Financing on the
revenues and profits of the business and on taxes paid by the business
and its employees.
Sec. 107.640 Requirement to file Portfolio Financing Reports (SBA Form
1031).
For each Financing of a Small Business (excluding guarantees), you
must submit a Portfolio Financing Report on SBA Form 1031 within 30
days of the closing date.
Sec. 107.650 Requirement to report portfolio valuations to SBA.
You must determine the value of your Loans and Investments in
accordance with Sec. 107.503. You must report such valuations to SBA
within 90 days of the end of the fiscal year in the case of annual
valuations, and within 30 days following the close of other reporting
periods. You must report material adverse changes in valuations at
least quarterly, within thirty days following the close of the quarter.
Sec. 107.660 Other items required to be filed by Licensee with SBA.
(a) Reports to owners. You must give SBA a copy of any report you
furnish to your investors, including any prospectus, letter, or other
publication concerning your financial operations or those of any
Portfolio Concern.
(b) Documents filed with SEC. You must give SBA a copy of any
report, application or document you file with the Securities and
Exchange Commission.
(c) Litigation reports. When you become a party to litigation or
other proceedings, you must give SBA a report within 30 days that
describes the proceedings and identifies the other parties involved and
your relationship to them.
(1) The proceedings covered by this paragraph (c) include any
action by you, or by your security holder(s) in a personal or
derivative capacity, against an officer, director, Investment Adviser
or other Associate of yours for alleged breach of official duty.
(2) SBA may require you to submit copies of the pleadings and other
documents SBA may specify.
(3) Where proceedings have been terminated by settlement or final
judgment, you must promptly advise SBA of the terms.
(4) This paragraph (c) does not apply to collection actions or
proceedings to enforce your ordinary creditors' rights.
(d) Other reports. You must file any other reports that SBA may
require by written directive.
Sec. 107.670 Application for exemption from civil penalty for late
filing of reports.
(a) If it is impracticable to submit any required report within the
time allowed, you may apply for an extension. The request for an
extension must:
(1) Be filed before the reporting deadline;
(2) Certify to an extraordinary occurrence, not within your
control, that makes timely filing of the report impracticable; and
(3) Be accompanied by written evidence of such occurrence, where
appropriate.
(b) Upon receipt of your request, SBA may exempt you from the civil
penalty provision of section 315(a) of the Act, in such manner and
under such conditions as SBA determines.
Sec. 107.680 Reporting changes in Licensee not subject to prior SBA
approval.
(a) Changes to be reported for post approval. (1) This section
applies to any changes in your Articles, ownership, capitalization,
management, operating area, or investment policies that do not require
SBA's prior approval. You must report such changes to SBA within 30
days for post approval. A processing fee of $200 must accompany each
request for post approval of new officers, directors, or Control
Persons.
(2) Exception for non-leveraged Licensees. If you do not have
outstanding Leverage or Earmarked Assets, you are not required to
obtain post approval of new directors or new officers other than your
chief operating officer; however, you must notify SBA of the new
directors or officers within 30 days.
(b) Approval by SBA. You may consider any change submitted under
this section Sec. 107.680 to be approved unless SBA notifies you to the
contrary within 90 days after receiving it. SBA's approval is
contingent upon your full disclosure of all relevant facts and is
subject to any conditions SBA may prescribe.
Examinations of Licensees by SBA for Regulatory Compliance
Sec. 107.690 Examinations.
SBA will examine all Licensees for the purpose of evaluating
regulatory compliance.
Sec. 107.691 Responsibilities of Licensee during examination.
You must make all books, records and other pertinent documents and
materials available for the examination, including any information
required by the examiner under Sec. 107.620(c). In addition, the
agreement between you and the independent public accountant
[[Page 3203]]
performing your audit must provide that any information in the
accountant's working papers be made available to SBA upon request.
Sec. 107.692 Examination fees.
(a) SBA will assess fees for examinations. Fees will be assessed
based on your assets as of the date of your latest certified financial
statement submitted to SBA prior to the examination. As a general rule,
SBA will not assess fees for special examinations to obtain specific
information. The rate table is as follows:
------------------------------------------------------------------------
Total assets of Licensee Base rate Percent of assets
------------------------------------------------------------------------
$0 to $1,500,000.................... $3,500 +0
$1,500,001 to $5,000,000............ $3,700 +.065% over $1,500,000
$5,000,001 to $10,000,000........... $6,000 +.02% over $5,000,000
$10,000,001 to $15,000,000.......... $7,000 +.01% over $10,000,000
$15,000,001 to $25,000,000.......... $7,700 +.015% over $15,000,000
$25,000,001 to $50,000,000.......... $9,200 +.015% over $25,000,000
$50,000,001 to $100,000,000......... $13,000 +.01% over $50,000,000
$100,000,001 or more................ $18,000 +.009% over $50,000,000
------------------------------------------------------------------------
(b) Delay Fee. If, in the judgment of SBA, the time required to
complete your examination is delayed due to your lack of cooperation or
the condition or your records, SBA may assess an additional fee of up
to $500 per day.
Subpart G--Financing of Small Businesses by Licensees
Determining the Eligibility of a Small Business for SBIC Financing
Sec. 107.700 Compliance with size standards in Part 121 of this
chapter as a condition of Assistance.
You are permitted to provide financial assistance and management
services only to a Small Business. To determine whether an applicant is
a Small Business, you may use either the financial size standards in
Sec. 121.301(c)(1) of this chapter or the industry standard covering
the industry in which the applicant is primarily engaged, as set forth
in Sec. 121.301(c)(2) of this chapter.
Sec. 107.710 Requirement to finance Smaller Businesses.
Your Portfolio must include Financings to Smaller Businesses.
(a) Definition of Smaller Business. A Smaller Business means a
business that:
(1) Together with its Affiliates has a net worth of not more than
$6.0 million and average net income after Federal income taxes
(excluding any carry-over losses) for the preceding two years no
greater than $2.0 million; or
(2) Both together with its affiliates, and by itself, meets the
size standard of Sec. 121.201 of this chapter at the time of the
Financing for the industry in which it is then primarily engaged.
(b) Phase 1 of Smaller Business Financing requirement. At the close
of your first complete fiscal year beginning on or after April 25,
1994, at least 10 percent of the total dollar amount of the Financings
you extended since April 25, 1994 must have been in Smaller Businesses.
(c) Phase 2 of Smaller Business Financing requirement. At the close
of each of your next fiscal years, at least 20 percent of the total
dollar amount of the Financings you extended since April 25, 1994 must
have been invested in Smaller Businesses.
(d) Financing a change of ownership which results in the creation
of a Smaller Business. The Financing of a change of ownership under
Sec. 107.750 which results in the creation of a Smaller Business
qualifies as a Smaller Business Financing.
(e) Non-compliance with this section. If you have not reached the
required percentage of Smaller Business Financings at the end of any
fiscal year, then you must be in compliance by the end of the following
fiscal year.
Sec. 107.720 Small Businesses that may be ineligible for Financing.
(a) Relenders or reinvestors. You are not permitted to finance any
business that is a relender or reinvestor.
(1) Definition. Relenders or reinvestors are businesses whose
primary business activity involves, directly or indirectly, providing
funds to others, purchasing debt obligations, factoring, or long-term
leasing of equipment with no provision for maintenance or repair.
(2) Exception. You may provide Venture Capital Financing to
Disadvantaged Businesses that are relenders or reinvestors (except
banks or savings and loans not insured by agencies of the federal
government, and agricultural credit companies). Without SBA's prior
written approval, total Financings under this paragraph (a)(2) that are
outstanding as of the close of your fiscal year must not exceed your
Regulatory Capital.
(b) Passive Businesses. You are not permitted to finance a passive
business.
(1) Definition. A business is passive if:
(i) It is not engaged in a regular and continuous business
operation (for purposes of this paragraph (b), the mere receipt of
payments such as dividends, rents, lease payments, or royalties is not
considered a regular and continuous business operation); or
(ii) Its employees are not carrying on the majority of day to day
operations, and the company does not provide effective control and
supervision, on a day to day basis, over persons employed under
contract; or
(iii) It passes through substantially all of the proceeds of the
Financing to another entity.
(2) Exception. You may finance a passive business if, for all
Financings extended, it passes substantially all the proceeds through
to the same eligible Small Business that is not passive.
(c) Real Estate Businesses. (1) You are not permitted to finance
any business classified under Major Group 65 (Real Estate) or Industry
No. 1532 (Operative Builders) of the SIC Manual, with the following
exceptions:
(i) Title Abstract companies (Industry No. 6541); and
(ii) Companies listed under Industry No. 6531 (for example, real
estate agents, brokers, escrow agents, managers and multiple listing
services) that derive at least 80 percent of their revenue from non-
Affiliate sources.
(2) You are not permitted to finance a business, regardless of SIC
classification, if the Financing is to be used to acquire realty or to
discharge an obligation relating to the prior acquisition of realty,
unless the Small Business:
(i) Is acquiring an existing property and will use at least 51
percent of the usable square footage for an eligible business purpose;
or
(ii) Is building or renovating a building and will use at least 67
percent of the usable square footage for an eligible business purpose.
(d) Project Financing. You are not permitted to finance a business
if:
(1) The assets of the business are to be reduced or consumed,
generally without replacement, as the life of the business progresses,
and the nature of the business requires that a stream of cash payments
be made to the business's financing sources, on a basis associated with
the continuing sale of assets. Examples include real estate development
projects and oil and gas wells; or
(2) The primary purpose of the Financing is to fund production of a
single item or defined limited number of items, generally over a
defined production period, and such production will constitute the
majority of the activities of the Small Business. Examples include
motion pictures and electric generating plants.
[[Page 3204]]
(e) Farm land purchases. You are not permitted to finance the
acquisition of farm land. Farm land means land which is or is intended
to be used for agricultural or forestry purposes, such as the
production of food, fiber, or wood, or is so taxed or zoned.
(f) Public interest. You are not permitted to finance any business
if the proceeds are to be used for purposes contrary to the public
interest, including but not limited to activities which are in
violation of law, or inconsistent with free competitive enterprise.
(g) Foreign investment--(1) General rule. You are not permitted to
finance a business if:
(i) The funds will be used substantially for a foreign operation;
or
(ii) At the time of the Financing or within one year thereafter,
more than 49 percent of the employees or tangible assets of the Small
Business are located outside the United States (unless you can show, to
SBA's satisfaction, that the Financing was used for a specific domestic
purpose).
(2) Exception. This paragraph (g) does not prohibit a Financing
used to acquire foreign materials and equipment or foreign property
rights for use or sale in the United States.
(h) Associated supplier. You are not permitted to finance a
business that purchases, or will purchase, goods or services from a
supplier who is your Associate, except under the following conditions:
(1) The amount of goods and services purchased (or to be purchased)
from your Associate with the proceeds of the Financing, or with funds
released as a result of the Financing, is less than 50 percent of the
total amount of the Financing (75 percent for a Section 301(d)
Licensee);
(2) The price of such goods and services is no higher than that
charged other customers of your Associate; and
(3) The Small Business purchases no capital goods from your
Associate.
(i) Financing Licensees. You are not permitted to provide funds,
directly or indirectly, that the Small Business will use:
(1) To purchase stock in or provide capital to a Licensee; or
(2) To repay an indebtedness incurred for the purpose of investing
in a Licensee.
Sec. 107.730 Financings which constitute conflicts of interest.
(a) General rule. You must not self-deal to the prejudice of a
Small Business, the Licensee, its shareholders or partners, or SBA.
Unless you obtain a prior written exemption from SBA for special
instances in which a Financing may further the purposes of the Act
despite presenting a conflict of interest, you must not directly or
indirectly:
(1) Provide Financing to any of your Associates.
(2) Provide Financing to an Associate of another Licensee if one of
your Associates has received or will receive any direct or indirect
Financing or a Commitment from that Licensee or a third Licensee
(including Financing or Commitments received under any understanding,
agreement, or cross dealing, reciprocal or circular arrangement).
(3) Borrow money from:
(i) A Small Business Financed by you;
(ii) An officer, director, or owner of at least a 10 percent equity
interest in such business; or
(iii) A Close Relative of any such officer, director, or equity
owner.
(4) Provide Financing to a Small Business to discharge an
obligation to your Associate or free other funds to pay such
obligation. This paragraph (a)(4) does not apply if the obligation is
to an Associate Lending Institution and is a line of credit or other
obligation incurred in the normal course of business.
(5) Provide Financing to a Small Business for the purpose of
purchasing property from your Associate, except as permitted under
Sec. 107.720(h).
(b) Rules applicable to Associates. Without SBA' s prior written
approval, your Associates must not, directly or indirectly:
(1) Borrow money from any Person described in paragraph (a)(3) of
this section.
(2) Receive from a Small Business any compensation in connection
with Assistance you provide (except as permitted under Secs. 107.825(c)
and 107.900), or anything of value for procuring, attempting to
procure, or influencing your action with respect to such Assistance.
(c) Applicability of other laws. You are also bound by any
restrictions in Federal or State laws governing conflicts of interest
and fiduciary obligations.
(d) Financings with Associates--(1) Financings with Associates
requiring prior approval. Without SBA's prior written approval, you may
not Finance any business in which your Associate has either a voting
equity interest, or total equity interests (including potential
interests), of at least five percent.
(2) Other Financings with Associates. If you and an Associate
provide Financing to the same Small Business, either at the same time
or at different times, you must be able to demonstrate to SBA's
satisfaction that the terms and conditions are (or were) fair and
equitable to you, taking into account any differences in the timing of
each party's financing transactions.
(3) Exceptions to paragraphs (d)(1) and (d)(2) of this section. A
Financing that falls into one of the following categories is exempt
from the prior approval requirement in paragraph (d)(1) of this section
or is presumed to be fair and equitable to you for the purposes of
paragraph (d)(2) of this section, as appropriate:
(i) Your Associate is a Lending Institution that is providing
financing under a credit facility in order to meet the operational
needs of the Small Business, and the terms of such financing are usual
and customary.
(ii) Your Associate invests in the Small Business on the same terms
and conditions and at the same time as you.
(iii) Both you and your Associate are leveraged Licensees, and both
have outstanding Participating Securities or neither has outstanding
Participating Securities.
(iv) Both you and your Associate are non-leveraged Licensees.
(e) Use of Associates to manage Portfolio Concerns. To protect your
investment, you may designate an Associate to serve as an officer,
director, or other participant in the management of a Small Business.
You must identify any such Associate in your records available for
SBA's review under Sec. 107.600. Without SBA's prior written approval,
the Associate must not:
(1) Have any other direct or indirect financial interest in the
Portfolio Concern that exceeds, or has the potential to exceed, 5
percent of the Portfolio Concern's equity.
(2) Have served for more than 30 days as an officer, director or
other participant in the management of the Portfolio Concern before you
provided Financing.
(3) Receive any income or anything of value from the Portfolio
Concern unless it is for your benefit, with the exception of director's
fees, expenses, and distributions based upon the Associate's ownership
interest in the Concern.
(f) 1940 and 1980 Act Companies: SEC exemptions. If you are a 1940
or 1980 Act Company and you receive an exemption from the Securities
and Exchange Commission for a transaction described in this
Sec. 107.730, you need not obtain SBA's approval of the transaction.
However, you must promptly notify SBA of the transaction and satisfy
the public notice requirements in paragraph (g) of this section.
(g) Public notice. Before SBA grants an exemption under this
Sec. 107.730, you
[[Page 3205]]
must publish notice of the transaction in a newspaper of general
circulation in the locality most directly affected by the transaction,
and furnish a certified copy to SBA within 10 days of publication. SBA
will publish a similar notice in the Federal Register.
Sec. 107.740 Portfolio diversification (``overline'' limitation).
(a) General rule. This Sec. 107.740 applies if you have outstanding
Leverage or want to be eligible for Leverage. Without SBA's prior
written approval, your aggregate outstanding Financings and Commitments
to a Small Business (including its Affiliates) must not exceed:
(1) 20 percent of Regulatory Capital for a Section 301(c) Licensee;
or
(2) 30 percent of Regulatory Capital for a Section 301(d)Licensee.
(b) Outstanding Financings. For the purposes of paragraph (a) of
this section, you must measure each outstanding Financing at its
current cost plus any amount of the Financing that was previously
written off.
(c) Adjustment to Regulatory Capital. For the purposes of paragraph
(a) of this section, you may compute a higher maximum permitted
investment in a Small Business (an ``increased limit'') by adding ``net
unrealized gains'' on Publicly Traded and Marketable securities to your
Regulatory Capital, subject to the following conditions:
(1) ``Net unrealized gains'' on Publicly Traded and Marketable
securities means unrealized gains on Publicly Traded and Marketable
securities minus unrealized losses on all Loans and Investments.
(2) You must value your Publicly Traded and Marketable securities
in accordance with your SBA-approved valuation policy.
(3) You must have positive Retained Earnings Available for
Distribution at the time you compute an increased limit under this
paragraph (c).
(4) At the time you first compute an increased limit, and as of the
first business day of each calendar quarter that the increased limit is
in effect, you must keep copies in your files of the NASDAQ listings
(or the Wall Street Journal) or written quotations from the market
makers quoting the Publicly Traded and Marketable securities which
support the adjustment.
(5) If your net unrealized gains on Publicly Traded and Marketable
securities are more than 30 percent below their original level on the
first business day of any calendar quarter, and remain so for the next
30 days, you agree to do one of the following to remain in compliance
with the terms of your Leverage:
(i) By the first day of the next calendar quarter, increase your
Regulatory Capital sufficiently to restore support for the increased
limit; or
(ii) Lower the increased limit to reflect the decrease in net
unrealized gains on Publicly Traded and Marketable securities, and
reduce any Financings that exceed the lower limit.
Example to paragraph (c) of this section. Your Regulatory
Capital is $2,500,000 and your overline limit is $500,000 (20
percent of $2,500,000). On January 15, 1995, you document net
unrealized gains on Publicly Traded and Marketable securities of
$200,000 and compute an increased limit of $540,000 (20 percent of
$2,700,000). You now make an investment of $540,000 in a Small
Business. Nothing changes until the first business day of April,
1996, when you document net unrealized gains on Publicly Traded and
Marketable securities of only $120,000, a reduction of more than 30
percent. Your net unrealized gains remain at this level for the next
30 days. Your increased limit is now only $524,000 (20 percent of
$2,620,000). By July 1, 1996, you must either increase Regulatory
Capital by $80,000 to restore your increased limit to $540,000, or
reduce your portfolio investment from $540,000 to $524,000.
Sec. 107.750 Conditions for financing a change of ownership of a Small
Business.
You may finance a change of ownership of a Small Business only
under the conditions set forth in this section.
(a) The Financing must:
(1) Promote the sound development or preserve the existence of the
Small Business;
(2) Help create a Small Business as a result of a corporate
divestiture; or
(3) Facilitate ownership in a Disadvantaged Business.
(b) The Resulting Concern (as defined in paragraph (c) of this
section) must:
(1) Be a Small Business under Sec. 107.700;
(2) Have 500 or fewer full-time equivalent employees; or meet one
of the appropriate debt/equity ratio tests:
(i) If you have outstanding Leverage, the Resulting Concern's ratio
of debt to equity must be no more than 5 to 1; or
(ii) If you have no outstanding Leverage, the Resulting Concern's
ratio of debt to equity must be no more than 8 to 1.
(c) Definitions. (1) The ``Resulting Concern'' is determined by
viewing the business as though the change of ownership had already
occurred, giving effect to all contemplated financing, mergers, and
acquisitions.
(2) For purposes of this section, ``debt'' means long-term debt,
including contingent liabilities, but excluding accounts payable,
operating leases, letters of credit, subordinated notes payable to the
seller, any other liabilities approved for exclusion by SBA and short-
term working capital loans (so long as the loans carry a zero balance
for 30 consecutive days during the concern's fiscal year).
(3) For purposes of this section, ``equity'' means common and
preferred stock (corporation), contributed capital (partnership), or
membership interests (limited liability company).
Sec. 107.760 How a change in size or activity of a Portfolio Concern
affects the Licensee and the Portfolio Concern.
(a) Effect on Licensee of a change in size of a Portfolio Concern.
If a Portfolio Concern no longer qualifies as a Small Business you may
keep your investment in the concern and:
(1) Subject to the overline limitations of Sec. 107.740, you may
provide additional Financing to the concern up to the time it makes a
public offering of its securities.
(2) Even after the concern makes a public offering, you may
exercise any stock options, warrants, or other rights to purchase
Equity Securities which you acquired before the public offering, or
fund Commitments you made before the public offering.
(b) Effect of a change in business activity occurring within one
year of Licensee's initial Financing--(1) Retention of Investment.
Unless you receive SBA's written approval, you may not keep your
investment in a Portfolio Concern, small or otherwise, which becomes
ineligible by reason of a change in its business activity within one
year of your initial investment.
(2) Request for SBA's approval to retain investment. If you request
that SBA approve the retention of your investment, your request must
include sufficient evidence to demonstrate that the change in business
activity was caused by an unforeseen change in circumstances and was
not contemplated at the time the Financing was made.
(3) Additional Financing. If SBA approves your request to retain an
investment under paragraph (b)(2) of this section, you may provide
additional Financing to the Portfolio Concern to the extent necessary
to protect against the loss of the amount of your original investment,
subject to the overline limitations of Sec. 107.740.
(c) Effect of a change in business activity occurring more than one
year after the initial Financing. If a Portfolio Concern becomes
ineligible because of a change in business activity more than one year
after your initial Financing you may:
(1) Retain your investment; and
[[Page 3206]]
(2) Provide additional Financing to the Portfolio Concern to the
extent necessary to protect against the loss of the amount of your
original investment, subject to the overline limitations of
Sec. 107.740.
Structuring Licensee's Financing of Eligible Small Businesses: Types of
Financing
Sec. 107.800 Financings in the form of Equity Securities.
(a) You may purchase the Equity Securities of a Small Business. You
may not, inadvertently or otherwise:
(1) Become a general partner in any unincorporated business; or
(2) Become jointly or severally liable for any obligations of an
unincorporated business.
(b) Definition. Equity Securities means stock of any class in a
corporation, stock options, warrants, limited partnership interests in
a limited partnership, membership interests in a limited liability
company, or joint venture interests. If the Financing agreement
contains debt-type acceleration provisions or includes redemption
provisions other than those permitted under Sec. 107.850, the security
will be considered a Debt Security for purposes of Sec. 107.855.
Sec. 107.810 Financings in the form of Loans.
You may make Loans to Small Businesses. A Loan means a transaction
evidenced by a debt instrument with no provision for you to acquire
Equity Securities.
Sec. 107.815 Financings in the form of Debt Securities.
You may purchase Debt Securities from Small Businesses.
(a) Definition. Debt Securities are instruments evidencing a loan
with an option or any other right to acquire Equity Securities in a
Small Business or its Affiliates, or a loan which by its terms is
convertible into an equity position. Consideration must be paid for all
options that you acquire.
(b) Restriction on options obtained by Licensee's management and
employees. If you have outstanding Leverage or plan to obtain Leverage,
your employees, officers, directors or general partners, or the general
partners of the management company that is providing services to you or
to your general partner, may obtain options in a Financed Small
Business only if:
(1) They participate in the Financing on a pari passu basis with
you; or
(2) SBA gives its prior written approval; or
(3) The options received are compensation for service as a member
of the board of directors of the Small Business, and such compensation
does not exceed that paid to other outside directors. In the absence of
such directors, fees must be reasonable when compared with amounts paid
to outside directors of similar companies.
Sec. 107.820 Financings in the form of guarantees.
At the request of a Small Business or where necessary to protect
your existing investment, you may guarantee the monetary obligation of
a Small Business to any non-Associate creditor.
(a) You may not issue a guaranty if:
(1) You would become subject to State regulation as an insurance,
guaranty or surety business;
(2) The amount of the guaranty plus any direct Financings to the
Small Business exceed the overline limitations of Sec. 107.740, except
that a pledge of the Equity Securities of the issuer or a subordination
of your lien or creditor position does not count toward your overline;
or
(3) The total financing cost to the Small Business exceeds the cost
of money limits of Sec. 107.855.
(b) Pledge of Licensee's assets as guaranty. For purposes of this
section, a guaranty with recourse only to specific asset(s) you have
pledged is equal to the fair market value of such asset(s) or the
amount of the debt guaranteed, whichever is less.
Sec. 107.825 Purchasing securities from an underwriter or other third
party.
(a) Securities purchased through or from an underwriter. You may
purchase the securities of a Small Business through or from an
underwriter if:
(1) You purchase such securities within 90 days of the date the
public offering is first made;
(2) Your purchase price is no more than the original public
offering price; and
(3) The amount paid by you for the securities (less ordinary and
reasonable underwriting charges and commissions) has been, or will be,
paid to the Small Business, and the underwriter certifies in writing
that this requirement has been met.
(b) Recordkeeping requirements. If you have outstanding Leverage or
plan to obtain Leverage, you must keep records available for SBA's
inspection which show the relevant details of the transaction,
including, but not limited to, date, price, commissions, and the
underwriter's certifications required under paragraph (c) of this
section.
(c) Underwriter's requirements. If you have outstanding Leverage or
plan to obtain Leverage, the underwriter must certify whether it is
your Associate. You may pay reasonable and customary commissions and
expenses to an Associate underwriter for the portion of an offering
that you purchase, provided it is no more than 25 percent of the total
offering. If you buy more than 25 percent of the offering, the amount
you pay to the Associate underwriter must not exceed the total of the
application and closing fees and reimbursable expenses permitted by
Sec. 107.860.
(d) Securities purchased from another Licensee or from SBA. You may
purchase from, or exchange with, another Licensee, Portfolio securities
(or any interest therein). Such purchase or exchange may only be made
on a non-recourse basis. You may not have more than one-third of your
total assets(valued at cost) invested in such securities. If you have
previously sold Portfolio Securities (or any interest therein) on a
recourse basis, you shall include the amount for which you may be
contingently liable in your overline computation.
(e) Purchases of securities from other non-issuers. You may
purchase securities of a Small Business from a non-issuer not
previously described in this Sec. 107.825 if:
(1) Such acquisition is a reasonably necessary part of the overall
sound Financing of the Small Business under the Act; or
(2) The securities are acquired to finance a change of ownership
under Sec. 107.750.
Structuring Licensee's Financing of an Eligible Small Business:
Terms and Conditions of Financing
Sec. 107.830 Minimum duration/term of financing.
(a) General rule for Section 301(c) Licensees. If you are a Section
301(c) Licensee, the duration/term of all your Financings must be for a
minimum period of five years. Exception: You may finance a
Disadvantaged Business for a minimum term of four years.
(b) General rule for Section 301(d) Licensees. The duration/term of
your Financings may be for a minimum period of four years.
(c) Restrictions on mandatory redemption of Equity Securities. If
you have acquired Equity Securities, options or warrants on terms that
include redemption by the Small Business, you must not require
redemption by the Small Business within the first five years of your
acquisition except as permitted in Sec. 107.850.
(d) Special rules for Loans and Debt Securities. (1) Term. The
minimum term for Loans and Debt Securities starts with the first
disbursement of the Financing.
[[Page 3207]]
(2) Prepayment before five years. You must permit voluntary
prepayment of Loans and Debt Securities by the Small Business at any
time during the initial five year term. You must obtain SBA's prior
written approval of any restrictions on the ability of the Small
Business to prepay other than the imposition of a reasonable prepayment
penalty under paragraph (d)(3) of this section.
(3) Prepayment penalties. You may charge a reasonable prepayment
penalty which must be agreed upon at the time of the Financing. If SBA
determines that a prepayment penalty is unreasonable, you must refund
the entire penalty to the Small Business. A prepayment penalty equal to
5 percent of the outstanding balance during the first year of any
Financing, declining by one percentage point per year through the fifth
year, is considered reasonable.
Sec. 107.835 Exceptions to minimum duration/term of Financing.
You may make a Short-term Financing for a term less than five years
if the Financing is:
(a) An interim financing (for a period not to exceed one year) in
contemplation of long-term Financing. The contemplated long-term
Financing must be in an amount at least equal to the short-term
Financing, and must be made by you alone or in participation with other
investors; or
(b) For protection of your prior investment(s); or
(c) For the purpose of Financing a change of ownership under
Sec. 107.750. The total amount of such Financings may not exceed 20
percent of your Loans and Investments (at cost) at the end of any
fiscal year; or
(d) For the purpose of aiding a Small Business in performing a
contract awarded under a Federal, State, or local government set-aside
program for ``minority'' or ``disadvantaged'' contractors.
Sec. 107.840 Maximum term of Financing.
The maximum term of any Loan or Debt Security Financing must be no
longer than 20 years.
Sec. 107.845 Maximum rate of amortization on Loans and Debt
Securities.
The principal of any Loan (or the loan portion of a Debt Security)
with a term of five years or less cannot be amortized faster than
straight line. If the term is greater than five years, the principal
cannot be amortized faster than straight line for the first five years.
Sec. 107.850 Restrictions on redemption of Equity Securities.
(a) A Portfolio Concern cannot be required to redeem Equity
Securities earlier than five years from the date of the first closing
unless:
(1) The concern makes a public offering, or has a change of
management or control, or files for protection under the provisions of
the Bankruptcy Code, or materially breaches your Financing agreement;
or
(2) You make a follow-on investment, in which case the new
securities may be redeemed in less than five years, but no earlier than
the redemption date associated with your earliest Financing of the
concern.
(b) The redemption price must be either:
(1) A fixed amount that is no higher than the price you paid for
the securities; or
(2) An amount that cannot be fixed or determined before the time of
redemption. In this case, the redemption price must be based on:
(i) A reasonable formula that reflects the performance of the
concern (such as one based on earnings or book value); or
(ii) The fair market value of the concern at the time of
redemption, as determined by a professional appraisal performed under
an agreement acceptable to both parties.
(c) Any method for determining the redemption price must be agreed
upon no later than the date of the first (or only) closing of the
Financing.
Sec. 107.855 Interest rate ceiling and limitations on fees charged to
Small Businesses (``Cost of Money'').
``Cost of Money'' means the interest and other consideration that
you receive from a Small Business. Subject to lower ceilings prescribed
by local law, the Cost of Money to the Small Business must not exceed
the ceiling determined under this section.
(a) Financings to which the Cost of Money rules apply. This section
applies to all Loans and Debt Securities. As required by
Sec. 107.800(b), you must include as Debt Securities any equity
interests with redemption provisions that do not meet the restrictions
in Sec. 107.850.
(b) When to determine the Cost of Money ceiling for a Financing.
You may determine your Cost of Money ceiling for a particular Financing
as of the date you issue a Commitment or as of the date of the first
closing of the Financing. Once determined, the Cost of Money ceiling
remains fixed for the duration of the Financing.
(c) How to determine the Cost of Money ceiling for a Financing. At
a minimum, you may use a Cost of Money ceiling of 19 percent for a Loan
and 14 percent for a Debt Security. To determine whether you may charge
more, do the following:
(1) Choose a base rate for your Cost of Money computation. The base
rate may be either the Debenture Rate currently in effect or your own
``Cost of Capital'' as determined under paragraph (d) of this section.
(2) For a Loan, add 11 percentage points to the base rate; for a
Debt Security, add 6 percentage points. In either case, round the sum
down to the nearest eighth of one percent.
(3) If the result is more than 19 percent (for a Loan) or 14
percent (for a Debt Security), you may use it as your Cost of Money
ceiling.
(4) If two or more Licensees participate in the same Financing of a
Small Business, the base rate used in this paragraph (c) is the highest
of the following:
(i) The current Debenture rate;
(ii) The Cost of Capital of the lead Licensee; or
(iii) The weighted average of the Cost of Capital for all Licensees
participating in the Financing.
(d) How to determine your Cost of Capital. ``Cost of Capital'' is
an optional computation of the weighted average interest rate you pay
on your ``qualified borrowings''. ``Qualified borrowings'' means your
Debentures together with your borrowings at or below the usual interest
rate charged by banks in your locality on the date your loan was made.
(1) For any fiscal year, you may compute your Cost of Capital:
(i) As of the first day of your fiscal year, to remain in effect
for the entire year; or
(ii) As of the first day of every fiscal quarter during the fiscal
year, to remain in effect for the duration of the quarter.
(2) For each qualified borrowing outstanding at your last fiscal
year or fiscal quarter end, multiply the ending principal balance (net
of related unamortized fees) by the number of days during the past four
fiscal quarters that the borrowing was outstanding, and divide the
result by 365.
(3) Add together the amounts computed for all borrowings under
paragraph (d)(2)of this section. The result is your weighted average
borrowings.
(4) For all qualified borrowings outstanding at your last fiscal
year or fiscal quarter end, determine the aggregate interest expense
for the past four fiscal quarters (excluding amortization of loan
fees).
(5) Divide the interest expense from paragraph (d)(4)of this
section by the
[[Page 3208]]
weighted average borrowings from paragraph (d)(3)of this section, and
multiply by 100. The result is your Cost of Capital, which you may use
to compute a Cost of Money ceiling under paragraph (c) of this section.
(e) SBA review of Cost of Capital computation. You must keep your
Cost of Capital computations in a separate file available for SBA's
review.
(1) A computation that is kept in such a file and is audited by
your independent public accountant is considered correct unless SBA
demonstrates otherwise.
(2) If a computation is not kept in such a file or is unaudited,
you must prove its accuracy to SBA's satisfaction.
(f) Charges included in the Cost of Money. The Cost of Money
includes all interest, points, discounts, fees, royalties, profit
participation, and any other consideration you receive from a Small
Business, except for the specific exclusions in paragraph (g) of this
section. For equity interests subject to the Cost of Money rules (see
paragraph (a) of this section), you must include:
(1) The portion of the fixed redemption price that exceeds your
original cost.
(2) Any amount of a redemption that is paid out of accounts other
than the Small Business's capital accounts (capital, paid-in surplus,
or retained earnings of a corporation; or partners' capital of a
partnership).
(g) Charges excluded from the Cost of Money. You may exclude from
the Cost of Money:
(1) Closing fees, application fees, and expense reimbursements,
each as permitted under Sec. 107.860.
(2) Reasonable prepayment penalties permitted under
Sec. 107.830(d)(3).
(3) Out-of-pocket conveyance and/or recordation fees and taxes.
(4) Reasonable closing costs.
(5) Fees for management services as permitted under Sec. 107.900.
(6) Reasonable and necessary out-of-pocket expenses you incur to
monitor the Financing.
(7) Board of director fees not in excess of those paid to other
outside directors, if your board representation meets the requirements
of Sec. 107.730(e).
(8) A reasonable fee for arranging financing for a Small Business
from a source that is neither a Licensee nor an Associate of yours. The
Small Business must agree in writing to pay such a fee before you
arrange the financing.
(9) A one-time ``bonus'' that satisfies the requirements in
paragraph (i) of this section.
(10) The difference between the contractual interest rate of the
Financing and a default rate of interest permitted as follows:
(i) If a Small Business is in default, you may charge a default
rate of interest as much as 7 percentage points higher than the
contractual rate until the default is cured.
(ii) For this purpose, ``default'' means either failure to pay an
amount when due or failure to provide information required under the
Financing documents.
(h) How to evaluate compliance with the Cost of Money ceiling. You
must determine whether a Financing is within the Cost of Money ceiling
based on its discounted cash flows, as follows:
(1) Beginning with the date of the first disbursement (``period
zero''), identify your cash inflows and cash outflows for each period
of the Financing. The appropriate period to use (such as years,
quarters, or months) depends on how you have structured the
disbursements and payments.
(2) Discount the cash flows back to the first disbursement date
using the Cost of Money ceiling from paragraph (d) of this section as
the discount rate.
(3) If the result is zero or less, the Financing is within the Cost
of Money ceiling; if it is greater than zero, the Financing exceeds the
Cost of Money ceiling.
(i) ``Bonus'' paid by a Small Business. You may provide Financing
to a Small Business that includes both a loan and a one-time ``bonus''
determined at the end of the loan term. For Cost of Money purposes, you
must treat such a Financing as a Debt Security. You may exclude a bonus
from the Cost of Money only if it is:
(1) Computed on or after the date that the Financing is repaid in
full or was originally due to be repaid in full, whichever is earlier;
(2) Not fixed or determinable before the computation date; and
(3) Fully contingent upon factor(s) that reflect the performance of
the Small Business. The period for which such performance is measured
must not extend beyond the Small Business's fiscal year end immediately
following repayment of the Financing. You must demonstrate to SBA's
satisfaction that the factor(s) used are appropriate indicators of
performance. Examples of generally acceptable factors include net
income and operating cash flow; examples of generally unacceptable
factors include gross revenues or gross margin.
Sec. 107.860 Financing fees and expense reimbursements a Licensee may
receive from a Small Business.
You may collect Financing fees and receive expense reimbursements
from a Small Business only as permitted under this Sec. 107.860.
(a) Application fee. You may collect a nonrefundable application
fee from a Small Business to review its Financing application. The
application fee may be collected at the same time as the closing fee
under paragraph (c) or (d) of this section, or earlier. The fee must
be:
(1) No more than 1 percent of the amount of Financing requested
(or, if two or more Licensees participate in the Financing, their
combined application fees are no more than 1 percent of the total
Financing requested); and
(2) Agreed to in writing by the Financing applicant.
(b) SBA review of application fees. For any fiscal year, if the
number of application fees you collect is more than twice the number of
Financings closed, SBA in its sole discretion may determine that you
are engaged in activities not contemplated by the Act, in violation of
Sec. 107.115.
(c) Closing fee--Loans. You may charge a closing fee on a Loan if:
(1) The fee is no more than 2 percent of the Financing amount (or,
if two or more Licensees participate in the Financing, their combined
closing fees are no more than 2 percent of the total Financing amount);
and
(2) You charge the fee no earlier than the date of the first
disbursement.
(d) Closing fee--Debt or Equity Financings. You may charge a
Closing Fee on a Debt Security or Equity Security Financing if:
(1) The fee is no more than 4 percent of the Financing amount (or,
if two or more Licensees participate in the Financing, their combined
closing fees are no more than 4 percent of the total Financing amount);
and
(2) You charge the fee no earlier than the date of the first
disbursement.
(e) Limitation on dual fees. If another Licensee or an Associate of
yours collects a transaction fee under Sec. 107.900(e) in connection
with your Financing of a Small Business, the sum of the transaction fee
and your application and closing fees cannot exceed the maximum
application and closing fees permitted under this Sec. 107.860.
(f) Expense reimbursements. You may charge a Small Business for the
reasonable out-of-pocket expenses, other than Management Expenses, that
you incur to process its Financing application. If SBA determines that
any of your reimbursed expenses are unreasonable or are Management
Expenses, SBA will require you to include such amounts in the Cost of
Money or refund them to the Small Business.
[[Page 3209]]
(g) Breakup fee. If a Small Business accepts your Commitment and
then fails to close the Financing because it has accepted funds from
another source, you may charge a ``breakup fee'' equal to the closing
fee that you would have been permitted to charge under paragraph (c) or
(d) of this section.
Sec. 107.865 Restrictions on Control of a Small Business by a
Licensee.
(a) General. You must not operate a business enterprise or function
as a holding company exercising Control over a business enterprise.
Neither you, nor you and your Associates, nor you and other Licensee(s)
(in the latter two cases, the ``Investor Group'') may, except as set
forth in this section, assume Control over a Small Business through
management agreements, voting trusts, majority representation on the
board of directors, or otherwise.
(b) Presumption of Control. Control over a Small Business will be
presumed to exist whenever you or the Investor Group own or control,
directly or indirectly:
(1) At least 50 percent of the outstanding voting securities, if
there are fewer than 50 shareholders; or
(2) More than 25 percent of the outstanding voting securities, if
there are 50 or more shareholders; or
(3) A block of at least 20 percent of the outstanding voting
securities, if there are 50 or more shareholders and no other party
holds a larger block.
(c) Rebuttals to presumption of Control. A presumption of Control
under paragraph (b) of this section is rebutted if:
(1) The management of the Small Business owns at least a 25 percent
interest in the voting securities of the business; and
(2) The management of the Small Business can elect at least 40
percent (rounded down) of the board members of a corporation, general
partners of a limited partnership, or managers of a limited liability
company, as appropriate, and the Investor Group can elect no more than
40 percent (rounded up). The balance of such officials may be elected
through mutual agreement by management and the Investor Group.
(d) Temporary Control permitted. You may acquire temporary Control:
(1) Where reasonably necessary for the protection of your
investment;
(2) If there has been a material breach of the Financing agreement
by the Small Business;
(3) If there has been a substantial change in the Small Business's
operations or products during the past 2 years, or such a change is the
intended result of the Financing, and the Investor Group's Financing
constitutes the Small Business's major source of capital; or
(4) In the case of a Start-up Financing, if you or the Investor
Group constitute the Small Business's major source of capital.
(e) Control certification. If you take temporary Control of a Small
Business under paragraph (d) of this section, you must file a Control
certification with SBA within 30 days. The certification must state:
(1) The date on which you took Control;
(2) The basis for taking Control; and
(3) Your agreement to relinquish Control within five years
(although you may, under extraordinary circumstances, request SBA's
approval of an extension beyond five years).
(f) Control acquired through enforcement actions. If you retain or
acquire Control through enforcement action, you must notify SBA
immediately and submit a Control certification within 30 days.
(g) Additional Financing for businesses under Licensee's Control.
If you assume Control of a Small Business, you may later provide
additional Financing, without an exemption under Sec. 107.730(a)(1).
Sec. 107.880 Assets acquired in liquidation of Portfolio securities.
You may acquire assets in full or partial liquidation of a Small
Business's obligation to you under the conditions permitted by this
Sec. 107.880. The assets may be acquired from the Small Business, a
guarantor of its obligation, or another party.
(a) Timely disposition of assets. You must dispose of assets
acquired in liquidation of a Portfolio security within a reasonable
period of time.
(b) Permitted expenditures to preserve assets. (1) You may incur
reasonably necessary expenditures to maintain and preserve assets
acquired.
(2) You may incur reasonably necessary expenditures for
improvements to render such assets saleable.
(3) You may make payments of mortgage principal and interest
(including amounts in arrears when you acquired the asset), pay taxes
when due, and pay for necessary insurance coverage.
(c) SBA approval of expenditures. This paragraph (c) applies if you
have outstanding Leverage or are applying for Leverage. Any application
for SBA approval under this paragraph must specify all expenses
estimated to be necessary pending disposal of the assets. Without SBA's
prior written approval:
(1) Your total expenditures under paragraphs (b)(1) and (b)(2) of
this section plus your total Financing(s) to the Small Business must
not exceed your overline limit under Sec. 107.740; and
(2) Your total expenditures under paragraph (b) of this section
plus your total Financing(s) to the Small Business must not exceed 35
percent of your Regulatory Capital.
Limitations on Disposition of Assets
Sec. 107.885 Disposition of assets to Licensee's Associates or to
competitors of Portfolio Concern.
(a) Sale of assets to Associate. Except with SBA's prior written
approval, you are not permitted to dispose of assets (including assets
acquired in liquidation) to any Associate if you have outstanding
Leverage or Earmarked Assets. As a prerequisite to such approval, you
must demonstrate that the proposed terms of disposal are at least as
favorable to you as the terms obtainable elsewhere.
(b) Sale of assets to competitor of Small Business. Except with the
prior written approval of the Portfolio Concern (if it is not under
your Control) or of SBA, you are not permitted to dispose of Portfolio
securities to a competitor of such concern. If SBA's prior approval is
not required, you must promptly notify SBA of any such disposal.
Management Services and Fees
Sec. 107.900 Management fees for services provided to a Small Business
by Licensee or its Associate.
This Sec. 107.900 applies to management services that you or your
Associate provide to a Small Business during the term of a Financing or
prior to Financing. It does not apply to management services that you
or your Associate provide to a Small Business that you do not finance.
Fees permitted under this section are not included in the Cost of Money
(see Sec. 107.855).
(a) Permitted management fees. You or your Associate may provide
management services to a Small Business financed by you if:
(1) You or your Associate have entered into a written contract with
the Small Business;
(2) The fees charged are for services actually performed;
(3) Services are provided on an hourly fee, project fee, or other
reasonable basis; and
(4) You can demonstrate to SBA, upon request, that the rate does
not exceed the prevailing rate charged for comparable services by other
organizations in the geographic area of the Small Business.
[[Page 3210]]
(b) Fees for service as a board member. You or your Associate may
receive fees in the form of cash, warrants, or other payments, for
services provided as members of the board of directors of a Small
Businesses Financed by you. The fees must not exceed those paid to
other outside board members. In the absence of such board members, fees
must be reasonable when compared with amounts paid to outside directors
of similar companies.
(c) SBA approval required. You must obtain SBA's prior written
approval of any management contract that does not satisfy paragraphs
(a) or (b) of this section.
(d) Recordkeeping requirements. You must keep a record of hours
spent and amounts charged to the Small Business, including expenses
charged.
(e) Transaction fees. (1) You may charge reasonable transaction
fees for work you or your Associate perform to prepare a client for a
public offering, private offering, or sale of all or part of the
business, and for assisting with the transaction. Compensation may be
in the form of cash, notes, stock, and/or options.
(2) Your Associate may charge market rate investment banking fees
to a Small Business on that portion of a Financing that you do not
provide.
Subpart H--Non-leveraged Licensees--Exceptions to Regulations
Sec. 107.1000 Licensees without Leverage--exceptions to the
regulations.
The regulatory exceptions in this section apply to Licensees with
no outstanding Leverage or Earmarked Assets.
(a) You are exempt from the following provisions (but you must come
into compliance with them to become eligible for Leverage):
(1) The overline limitation in Sec. 107.740.
(2) The restrictions in Sec. 107.530 on investments of idle funds,
provided you do not engage in activities not contemplated by the Act.
(3) The restrictions in Sec. 107.550 on third-party debt.
(4) The restrictions in Sec. 107.880 on expenses incurred to
maintain or improve assets acquired in liquidation of Portfolio
securities.
(5) The recordkeeping requirements and fee limitations in
Sec. 107.825(b) and (c), respectively, for securities purchased through
or from an underwriter.
(b) You are exempt from the requirements to obtain SBA's prior
approval for:
(1) A decrease in your Regulatory Capital of more than two percent
under Sec. 107.585 (but not below the minimum required under the Act or
these regulations). You must report the reduction to SBA within 30
days.
(2) Disposition of any asset to your Associate under Sec. 107.885.
(3) A contract to employ an Investment Adviser/Manager under
Sec. 107.510. However, you must notify SBA of the Management Expenses
to be incurred under such contract, or of any subsequent material
changes in such Management Expenses, within 30 days of execution. In
order to become eligible for Leverage, you must have the contract
approved by SBA.
(4) Your initial Management Expenses under Sec. 107.140 and
increases in your Management Expenses under Sec. 107.520. However, you
must have your Management Expenses approved by SBA in order to become
eligible for Leverage.
(5) Options obtained from a Small Business by your management or
employees under Sec. 107.815(b).
(c) You are exempt from the requirement in Sec. 107.680 to obtain
SBA's post approval of new directors and new officers, other than your
chief operating officer. However, you must notify SBA of the new
directors or officers within 30 days, and you must have all directors
and officers approved by SBA in order to become eligible for Leverage.
Subpart I--SBA Financial Assistance for Licensees (Leverage)
General Information About Obtaining Leverage
Sec. 107.1100 Types of Leverage available.
(a) Types of Leverage available for Section 301(c) Licensees. If
you are a Section 301(c) Licensee, you may apply for Leverage from SBA
in one or both of the following forms:
(1) The purchase or guarantee of your Debentures.
(2) The purchase or guarantee of your Participating Securities.
(b) Types of Leverage available for Section 301(d) Licensees. If
you are a Section 301(d) Licensee, you may apply for Leverage from SBA
in one or more of the following forms:
(1) The purchase or guarantee of your Debentures.
(2) The purchase or guarantee of your Participating Securities.
(3) The purchase of your Preferred Securities.
(c) Subsidized and non-subsidized Debentures available to
Licensees. If you are a Section 301(d) Licensee, you may issue both
subsidized and non-subsidized Debentures. If you are a Section 301(c)
Licensee, you may issue only non-subsidized Debentures.
(1) Non-subsidized Debentures. SBA may purchase or guarantee non-
subsidized Debentures under section 303(b) of the Act. You pay interest
on a non-subsidized Debenture at the rate stated on its face.
(2) Subsidized Debentures. SBA may purchase or guarantee subsidized
Debentures under section 303(c) of the Act. On a guaranteed Debenture,
during the first 5 years of the term, you pay an interest rate that is
300 basis points below the rate stated on the face of the Debenture. On
a Debenture that SBA purchases, you pay a reduced interest rate
determined under section 317 of the Act.
Sec. 107.1110 How to apply for Leverage.
(a) Application forms. Select the appropriate form from the
following table:
------------------------------------------------------------------------
Type of Leverage you are applying for: Application form:
------------------------------------------------------------------------
Debentures (any type)................. SBA Form 1022.
4% Preferred Securities............... SBA Form 1022A.
Participating Securities....
FR Doc. 96-1351 PART 107SMALL BUSINESS INVESTMENT COMPANIES
.......... SBA Form 1022B.
------------------------------------------------------------------------
(b) Where to send your application. Send all Leverage applications
to SBA, Investment Division, 409 Third Street, S.W., Washington, D.C.
20416.
Sec. 107.1120 General eligibility requirements for Leverage.
To be eligible for Leverage, you must:
(a) Demonstrate a need for Leverage, evidenced by your investment
activity and a lack of sufficient funds for investment. For your first
issuance of Leverage, if you have invested at least 50 percent of your
Leverageable Capital, you are presumed to lack sufficient funds for
investment.
(b) Have adequate Private Capital to satisfy the requirements for
financial viability under Sec. 107.200.
(c) Meet the minimum capital requirements of Sec. 107.210 or
Sec. 107.220, as appropriate.
(d) Show, to the satisfaction of SBA, that your management is
qualified and has the knowledge, experience, and capability necessary
for investing in the types of businesses contemplated by the Act, the
regulations in this part and your business plan.
(e) Be in compliance with the regulations in this part.
(f) If required by SBA, have your Control Person(s) assume, in
writing, personal responsibility for your Leverage, effective only if
such Control Person(s) participate (directly or indirectly) in a
transfer of Control not approved by SBA.
[[Page 3211]]
Sec. 107.1130 Leverage fees payable by Licensee.
(a) User fee for Debentures and Participating Securities. You must
pay a user fee to SBA for each issuance of a Debenture or Participating
Security. The fee is 2 percent of the face amount of the Leverage
issued.
(b) Payment of user fee. If you issue a Debenture or Participating
Security:
(1) To repay or redeem existing Leverage, you must pay the user fee
before SBA will guarantee or purchase the new Debenture or
Participating Security.
(2) That is not used to repay or redeem existing Leverage, SBA will
deduct the user fee from the proceeds remitted to you, unless you
prepaid the fee under Sec. 107.1210.
(c) Refundability. The user fee is not refundable under any
circumstances.
(d) Other Leverage fees. SBA may establish a fee structure for
services performed by the CRA. SBA will not collect any fee for its
guarantee of TCs.
Sec. 107.1140 Licensee's acceptance of SBA remedies under
Secs. 107.1800 through 107.1820.
If you issue Leverage after April 25, 1994, you automatically agree
to the terms and conditions in Secs. 107.1800 through 107.1820 as they
exist at the time of issuance. The effect of these terms and conditions
is the same as if they were fully incorporated in the terms of your
Leverage.
Maximum Amount of Leverage for Which a Licensee Is Eligible
Sec. 107.1150 Maximum amount of Leverage for a Section 301(c)
Licensee.
(a) Maximum amount of Leverage. If you are a Section 301(c)
Licensee, use the following table to determine the maximum amount of
Leverage you may have outstanding at any time:
------------------------------------------------------------------------
Then your maximum Leverage
If your Leverageable Capital is: is:
------------------------------------------------------------------------
Not over $15,000,000...................... 300% of Leverageable
Capital.
Over $15,000,000 but not over $30,000,000. $45,000,000 + [200% of
[Leverageable Capital--
$15,000,000)].
Over $30,000,000 but not over $45,000,000. $75,000,000 + [100% of
[(Leverageable Capital--
$30,000,000)].
Over $45,000,000.......................... $90,000,000.
------------------------------------------------------------------------
(b) Exceptions to maximum Leverage provisions--(1) Licensees under
Common Control. Two or more Licensees under Common Control may have
aggregate outstanding Leverage over $90,000,000 only if SBA gives them
permission to do so. SBA may grant such permission on a case-by-case
basis only. SBA may impose any terms and conditions SBA considers
appropriate to minimize its risk of loss in the event of default.
(2) Licensees with excess Leverage issued before March 31, 1993. If
you had outstanding Debentures on March 31, 1993 that exceeded 300
percent of your Leverageable Capital:
(i) You do not have to prepay the excess amount.
(ii) You may apply for an additional Debenture guarantee or
Participating Security guarantee if you use the proceeds solely to pay
the amount due at maturity on a Debenture issued before March 31, 1993.
The new Debenture or Participating Security must mature on or before
September 30, 2002.
(iii) You must maintain at least 65 percent of your ``Total Funds
Available for Investment'' in ``Venture Capital Financings'' (as
defined in Sec. 107.1160(e) and (f), respectively) until your
outstanding Debentures no longer exceed 300 percent of your
Leverageable Capital.
(3) Maximum amount of Participating Securities. See Sec. 107.1170.
Sec. 107.1160 Maximum amount of Leverage for a Section 301(d)
Licensee.
(a) Maximum amount of subsidized Leverage. (1) ``Subsidized
Leverage'' means Debentures with a reduced interest rate and Preferred
Securities. If you are a Section 301(d) Licensee:
(i) The maximum amount of subsidized Leverage you may have
outstanding at any time is the lesser of 400 percent of your
Leverageable Capital, or $35,000,000. The same limit applies to a group
of Section 301(d) Licensees under Common Control.
(ii) The maximum amount of Preferred Securities you may have
outstanding at any time is 200 percent of your Leverageable Capital.
(2) Certain types and amounts of subsidized Leverage have special
eligibility requirements (see paragraphs (c) and (d) of this section).
(b) Maximum amount of total Leverage. Use Sec. 107.1150(a) and
(b)(1) to determine your maximum amount of Leverage as if you were a
Section 301(c) Licensee. If the result is more than your maximum
subsidized Leverage, then this is your maximum total (subsidized plus
non-subsidized) Leverage. Otherwise, your maximum total Leverage is the
same as your maximum subsidized Leverage. For Participating Securities,
see Sec. 107.1170.
(c) Special eligibility requirements for fourth tier of Leverage. A
``fourth tier of Leverage'' is any amount of outstanding Leverage in
excess of 300 percent of your Leverageable Capital.
(1) To qualify for a fourth tier of Leverage, you must have
invested (or have Commitments to invest) at least 30 percent of your
``Total Funds Available for Investment'' in ``Venture Capital
Financings'' (see the definitions in paragraphs (e) and (f) of this
section).
(2) While you have a fourth tier of Leverage, you must maintain
Venture Capital Financings (at cost) that equal at least 30 percent of
your Total Funds Available for Investment.
(d) Special eligibility requirements for second tier of Preferred
Securities. A ``second tier of Preferred Securities'' is any amount of
outstanding Preferred Securities in excess of 100 percent of your
Leverageable Capital.
(1) To qualify for a second tier of Preferred Securities:
(i) If your license was issued after October 13, 1971, you must
have at least $500,000 of Leverageable Capital.
(ii) You must have invested (or have Commitments to invest) at
least the same dollar amount in Venture Capital Financings.
(2) While you have a second tier of Preferred Securities, you must
maintain at least the same dollar amount of Venture Capital Financings
(at cost).
(e) Definition of ``Total Funds Available for Investment''. Total
Funds Available for Investment means the result obtained from the
following formula:
T = .90 x (CA + LI)
Where:
T = Total funds available for investment
CA = Total current assets
LI = Total Loans and Investment at cost (as reported on SBA Form 468),
net of current maturities
(f) Definition of ``Venture Capital Financing''. Venture Capital
Financing means an investment represented by common or preferred stock,
a limited partnership interest, or a similar ownership interest; or by
an unsecured debt instrument that is subordinated by its terms to all
other borrowings of the issuer.
(1) A debt secured by any agreement with a third party is not a
Venture Capital Financing, whether or not you have a security interest
in any asset of the third party or have recourse against the third
party.
(2) A Financing that originally qualified as a Venture Capital
Financing will continue to qualify (at its original cost), even if you
later must report it on SBA Form 468 under either Assets Acquired in
Liquidation of Portfolio Securities or Operating Concerns Acquired.
[[Page 3212]]
Sec. 107.1170 Maximum amount of Participating Securities for any
Licensee.
The maximum amount of Participating Securities you may have
outstanding at any time is 200 percent of your Leverageable Capital. If
you are a Section 301(d) Licensee, the maximum combined amount of
Participating Securities and Preferred Securities you may have
outstanding at any time is 200 percent of your Leverageable Capital.
Conditional Commitments by SBA To Reserve Leverage for a Licensee
Sec. 107.1200 SBA's Leverage commitment to a Licensee--application
procedure, amount, and term.
(a) General. Under the provisions in Secs. 107.1200 through
107.1240, you may apply for SBA's conditional commitment to reserve a
specific amount and type of Leverage for your future use. You may then
apply to draw down Leverage against the commitment.
(b) Applying for a Leverage commitment. SBA will notify you when it
is accepting requests for Leverage commitments. Upon receipt of your
request, SBA will send you a complete application package.
(c) Limitations on the amount of a Leverage commitment. The amount
of any Leverage commitment must be at least $500,000. It must not
exceed 100 percent of your Regulatory Capital or your remaining
Leverage eligibility, whichever is less.
(d) Term of Leverage commitment. SBA's Leverage commitment will
automatically lapse at 5:00 P.M. Eastern Time on August 1 of the next
full Federal fiscal year following issuance of the commitment.
Sec. 107.1210 Commitment fees payable by Licensee.
(a) Commitment fees. As a condition of SBA's Leverage commitment,
and before you may draw any Leverage, you must pay SBA a non-refundable
fee of:
(1) 3 percent of the face amount of the Debentures or Participating
Securities reserved under the commitment; or
(2) 1 percent of the issue price of Preferred Securities reserved
under the commitment.
(b) Credit for user fee. The 3 percent commitment fee paid by
issuers of Debentures or Participating Securities under paragraph
(a)(1) of this section includes the 2 percent user fee required under
Sec. 107.1130. If you pay the commitment fee, you do not have to pay
the user fee separately.
(c) Automatic cancellation of commitment. Unless you pay the full
amount of the commitment fee by 5:00 P.M. Eastern Time on the 30th
calendar day following the issuance of SBA's Leverage commitment, the
commitment will be automatically canceled.
Sec. 107.1220 Requirement for Licensee to file quarterly financial
statements.
As long as any part of SBA's Leverage commitment is outstanding,
you must give SBA a Financial Statement on SBA Form 468 (Short Form) as
of the close of each quarter of your fiscal year (other than your
fourth fiscal quarter, which is covered by your annual filing of Form
468 under Sec. 107.630(a)). You must file this form within 30 days
after the close of the quarter, or with any request for a draw that you
make within such 30-day period. You will not be eligible for a draw if
you are not in compliance with this Sec. 107.1220.
Sec. 107.1230 Draw-downs by Licensee under SBA's Leverage commitment.
(a) Licensee's authorization of SBA to purchase or guarantee
securities. By submitting a request for a draw against SBA's Leverage
commitment, you:
(1) Authorize SBA to purchase your Preferred Security; or
(2) Authorize SBA, or any agent or trustee SBA designates, to
guaranty your Debenture or Participating Security and to sell it with
SBA's guarantee.
(b) Limitations on amount of draw. For Debentures or Participating
Securities, any draw against SBA's Leverage commitment must be at least
$500,000; amounts above $500,000 must be in multiples of $100,000. You
may issue Preferred Securities in any amount.
(c) Effect of regulatory violations on Licensee's eligibility for
draws.--(1) General rule. You are eligible to make a draw against SBA's
Leverage commitment only if you are in compliance with all applicable
provisions of the Act and SBA regulations (i.e., no unresolved
statutory or regulatory violations).
(2) Exception to general rule. If you are not in compliance, you
may still be eligible for draws if:
(i) SBA determines that your outstanding violations are of non-
substantive provisions of the Act or regulations and that you have not
repeatedly violated any non-substantive provisions; or
(ii) You have agreed with SBA on a course of action to resolve your
violations and such agreement does not prevent you from issuing
Leverage.
(d) Procedures for funding draws. You may request a draw at any
time during the term of the commitment. With each request, submit the
following documentation:
(1) If your request is submitted within 30 days following the close
of your fiscal quarter, a Financial Statement on SBA Form 468 (Short
Form) prepared as of the close of that fiscal quarter; otherwise, a
statement certifying that there has been no material adverse change in
your financial condition since your last filing of SBA Form 468 (Long
or Short Form).
(2) A statement certifying that to the best of your knowledge and
belief, you are in compliance with all provisions of the Act and SBA
regulations (i.e., no unresolved regulatory or statutory violations),
or a statement listing any specific violations you are aware of. Either
statement must be executed by one of the following:
(i) An officer of the Licensee;
(ii) An officer of a corporate general partner of the Licensee; or
(iii) An individual who is authorized to act as or for a general
partner of the Licensee.
(3) A statement that the proceeds are needed to fund one or more
particular Small Businesses. If required by SBA, the statement must
include the name and address of each Small Business, and the amount and
anticipated closing date of each proposed Financing.
(e) Reporting requirements after drawing funds. (1) Within 30
calendar days after the actual closing date of each Financing funded
with the proceeds of your draw, you must file an SBA Form 1031
confirming the closing of the transaction.
(2) If SBA required you to provide information concerning a
specific planned Financing under paragraph (d)(3) of this section, and
such Financing has not closed within 60 calendar days after the
anticipated closing date, you must give SBA a written explanation of
the failure to close.
(3) If you do not comply with this paragraph (e), you will not be
eligible for additional draws. SBA may also determine that you are not
in compliance with the terms of your Leverage under Secs. 107.1810 or
107.1820.
Sec. 107.1240 Funding of Licensee's draw request through sale to
short-term investor.
(a) Licensee's authorization of SBA to arrange sale of securities
to short-term investor. By submitting a request for a draw of Debenture
or Participating Security Leverage, you authorize SBA, or any agent or
trustee SBA designates, to enter into any agreements (and to bind you
to such agreements) necessary to accomplish:
(1) The sale of your Debenture or Participating Security to a
short-term investor;
[[Page 3213]]
(2) The purchase of your security from the short-term investor,
either by you or on your behalf; and
(3) The pooling of your security with other securities with the
same maturity date.
(b) Sale of Debentures to a short-term investor. If SBA sells your
Debenture to a short-term investor:
(1) The sale will be at a discount based on an interest rate
determined under section 303(b) of the Act (without any interest rate
subsidy), as if the maturity date of the Debenture were the next
scheduled date for the sale of Debenture Trust Certificates.
(2) If the actual sale of Trust Certificates takes place after the
scheduled date, you must pay the short-term investor daily interest on
the Debenture, at the same rate, from the scheduled sale date to the
actual sale date. This additional interest is due on the actual sale
date. Failure to pay the interest constitutes noncompliance with the
terms of your Leverage (see Secs. 107.1810 and 107.1820).
(c) Sale of Participating Securities to a short-term investor. If
SBA sells your Participating Security to a short-term investor:
(1) The sale price will be the face amount.
(2) At the closing of the next scheduled sale of Participating
Security Trust Certificates, you (or SBA, as guarantor) must pay the
short-term investor Earned Prioritized Payments at a rate determined
under section 303(b) of the Act, as if the maturity date of the
Participating Security were the next scheduled date for the sale of
Trust Certificates.
(d) Licensee's right to repurchase its securities before pooling.
You may repurchase your securities from the short-term investor before
they are pooled. To do so, you must:
(1) Give SBA written notice at least 10 days before the cut-off
date for the pool in which your security is to be included; and
(2) Pay the face amount of the Debenture, or the face amount of the
Participating Security plus Earned Prioritized Payments, to the short-
term investor.
Exchange of Outstanding Debentures for Participating or Preferred
Securities--Section 301(d) Licensees
Sec. 107.1350 Exchange by Section 301(d) Licensee of Debentures for
Preferred or Participating Securities.
(a) Conditions for exchange of Debentures. A Section 301(d)
Licensee may, in SBA's discretion, retire an eligible Debenture through
the issuance of Preferred or Participating Securities. To do so, you
must:
(1) Pay all unpaid accrued interest on the Debenture, plus any
applicable prepayment penalties, fees, and other charges.
(2) Comply with all conditions that apply to the issuance of
Preferred or Participating Securities.
(b) Debentures not eligible for exchange. You may not retire a
Debenture by issuing Preferred or Participating Securities if SBA
guaranteed or purchased it on the basis of funds not included in your
Leverageable Capital. You must repay such a Debenture at its maturity
date, unless SBA extends it. SBA has discretion to extend the maturity
to a date not more than 15 years from the date of issuance if SBA
believes the extension is necessary for orderly liquidation of the
indebtedness.
Preferred Securities Leverage--Section 301(d) Licensees
Sec. 107.1400 Stock dividends or partnership distributions on 4
percent Preferred Securities.
Preferred Securities that SBA purchases from a Section 301(d)
Licensee may be in the form of either preferred stock issued at par
value or a preferred limited partnership interest issued at face value.
When you issue Preferred Securities, you agree to pay SBA a dividend or
partnership distribution of 4 percent per year, from the date you issue
Preferred Securities to the date you repay them, both inclusive. The
dividend or partnership distribution is:
(a) Computed on the par value of the outstanding stock or the face
value of the outstanding limited partnership interest.
(b) Cumulative. This means that if you do not pay the entire
dividend or partnership distribution for a given fiscal year, the
unpaid balance accumulates as a distribution in arrears. You do not
have to pay interest on distributions in arrears.
(c) Preferred. This means that you must pay SBA in full (including
distributions in arrears) before setting aside or paying any amount to
any other equity holder.
(d) Payable at the discretion of your Board of Directors or General
Partner(s), except that all distributions in arrears must be paid in
full when you redeem the Preferred Securities.
Sec. 107.1410 Requirement to redeem 4 percent Preferred Securities.
You must redeem 4 percent Preferred Securities not later than 15
years from the date of issuance. At the redemption date, you must pay
to SBA:
(a) The par value (of preferred stock) or face value (of a
preferred limited partnership interest); plus
(b) Any unpaid dividends or partnership distributions accrued to
the redemption date.
Sec. 107.1420 Articles requirements for 4 percent Preferred Securities
issuers.
You may issue 4 percent Preferred Securities only if your Articles
contain all the provisions in Secs. 107.1400 and 107.1410.
Sec. 107.1430 Redeeming 4 percent Preferred Securities with proceeds
of non-subsidized Debentures.
If SBA approves, a Section 301(d) Licensee may use the proceeds of
a Debenture to redeem Preferred Securities at their mandatory
redemption date, including any accrued unpaid dividends or partnership
distributions. For this purpose, you may issue only a non-subsidized
Debenture (see Sec. 107.1100(c)).
Sec. 107.1440 Three percent preferred stock issued before November 21,
1989.
Before November 21, 1989, Preferred Securities were available only
in the form of preferred stock and had a preferred and cumulative
dividend of 3 percent. If you have such preferred stock outstanding,
you must follow Sec. 107.1400 (except for Sec. 107.1400(d)),
substituting ``3 percent'' for ``4 percent'' throughout.) Dividends on
3 percent preferred stock are payable at the discretion of your Board
of Directors or General Partner(s), except that all dividends in
arrears must be paid in full before any non-SBA investor receives any
distribution. Upon your liquidation, SBA is entitled to payment of all
dividends in arrears even if you have no Retained Earnings Available
for Distribution at such time.
Sec. 107.1450 Optional redemption of Preferred Securities.
(a) Redemption at par or face value. A Section 301(d) Licensee may
redeem Preferred Securities at any time, provided you give SBA at least
30 days written notice. You may redeem all or only part of your
Preferred Securities, but the par value or face value of the securities
being redeemed must be at least $50,000. At the redemption date, you
must pay to SBA:
(1) The par value (of preferred stock) or face value (of a
preferred limited partnership interest); plus
(2) Any unpaid dividends or partnership distributions accrued to
the redemption date.
[[Page 3214]]
(b) Repurchase of 3 percent preferred stock for less than par
value. If you issued 3 percent preferred stock to SBA, you may ask SBA
to sell it back to you at a price less than its par value. The terms
and conditions of any such transaction will be as set forth in the
Notice published in the Federal Register on April 1, 1994 (Copies of
this notice are available from SBA, 409 3rd Street, S.W., Washington,
D.C., 20416). SBA has sole discretion to:
(1) Approve or disapprove the sale.
(2) Determine the sale price after considering any factors SBA
considers appropriate.
(3) Determine the form of payment SBA will accept. SBA is not
authorized to accept the proceeds of a subsidized Debenture as payment.
Participating Securities Leverage
Sec. 107.1500 General description of Participating Securities.
(a) Types of Participating Securities. Participating Securities are
redeemable, preferred, equity-type securities. SBA may purchase or
guarantee Participating Securities issued by Licensees in the form of
limited partnership interests, preferred stock, or debentures with
interest payable only to the extent of earnings. The structure, terms
and conditions of Participating Securities are set forth in detail in
Secs. 107.1500 through 107.1590.
(b) Special eligibility requirements for Participating Securities.
In addition to the general eligibility requirements for Leverage under
Sec. 107.1120, Participating Securities issuers must also comply with
special rules on:
(1) Minimum capital (see Sec. 107.220).
(2) Liquidity (see Sec. 107.1505).
(3) Non-SBA borrowing (see Sec. 107.570).
(4) Making Equity Capital Investments in Small Businesses, as
follows:
(i) General rule. If you issue Participating Securities, you must
invest an amount equal to the Original Issue Price of such securities
solely in Equity Capital Investments.
(ii) Continuing requirement to maintain Equity Capital Investments.
Unless SBA permits otherwise, once you have met the initial investment
requirement of this paragraph (b)(4), you must maintain Equity Capital
Investments with an original cost equal to or greater than the
outstanding balance of Participating Securities in your portfolio,
measured as of the end of each fiscal year.
(c) Special features of Participating Securities--Prioritized
Payments, Adjustments, and Profit Participation. When you issue
Participating Securities, you agree to make the following payments:
(1) Prioritized Payments. Depending upon the type of Participating
Security you issue, Prioritized Payments may be preferred partnership
distributions, preferred dividends, or interest. Your obligation to pay
Prioritized Payments is contingent upon your profits as determined
under Sec. 107.1520.
(2) Adjustments to Prioritized Payments. If you have unpaid
Prioritized Payments, you must compute Adjustments, which are
additional contingent obligations determined under Sec. 107.1520. The
conditions for paying Adjustments are the same as for Prioritized
Payments.
(3) SBA Profit Participation. Profit Participation is an amount
payable to SBA under Sec. 107.1530 in consideration for SBA's guarantee
of your Participating Securities.
(d) Distributions by Licensees issuing Participating Securities.
Sections 107.1540 through 107.1580 govern both required and optional
Distributions by Participating Securities issuers. Distributions
include both profit distributions and returns of capital, paid either
to SBA or to your non-SBA investors.
(e) Mandatory redemption of Participating Securities. You must
redeem Participating Securities at the redemption date, which is the
same as the maturity date of the Trust Certificates for the Trust
containing such securities. The redemption date can never be later than
15 years after the issue date. You must pay the Redemption Price plus
any unpaid Earned Prioritized Payments and any earned Adjustments due
under Sec. 107.1520.
(f) Priority of Participating Securities in liquidation of
Licensee. In the event of your liquidation, the following are senior in
priority, for all purposes, to all other equity interests you have
issued at any time:
(1) The Redemption Price of Participating Securities;
(2) Any Prioritized Payments and earned Adjustments; and
(3) Any Profit Participation allocated to SBA under Sec. 107.1530.
Sec. 107.1505 Liquidity requirements for Licensees issuing
Participating Securities.
If you have outstanding Participating Securities, you must maintain
sufficient liquidity to avoid a condition of Liquidity Impairment. Such
a condition will constitute noncompliance with the terms of your
Leverage under Sec. 107.1820(e).
(a) Definition of Liquidity Impairment. A condition of Liquidity
Impairment exists when your Liquidity Ratio, as determined in paragraph
(b) of this section, is less than 1.20. You are responsible for
calculating whether you have a condition of Liquidity Impairment as of
the close of your fiscal year, at the time of application for Leverage,
or at such time as you contemplate making any Distribution.
(b) Computation of Liquidity Ratio. Your Liquidity Ratio equals
your Total Current Funds Available (A) divided by your Total Current
Funds Required (B), as determined in the following table:
Calculation of Liquidity Ratio
------------------------------------------------------------------------
Amount
Financial account reported on Weight Weighted
SBA Form 468 amount
------------------------------------------------------------------------
Cash and invested idle funds. .............. x 1.00 ..............
Commitments from investors... .............. x 1.00 ..............
Current maturities........... .............. x 0.50 ..............
Other current assets......... .............. x 1.00 ..............
Publicly Traded and .............. x 0.65 ..............
Marketable Securities.
Anticipated operating revenue (\1\) x 1.00 ..............
for next 12 months.
------------------------------------------------------------------------
Total Current Funds .............. ......... A
Available.
Current liabilities.......... .............. x 1.00 ..............
Commitments to Small .............. x 0.75 ..............
Businesses.
Anticipated operating expense (\1\) x 1.00 ..............
for next 12 months.
Anticipated interest expense (\1\) x 1.00 ..............
for next 12 months.
Contingent liabilities .............. x 0.25 ..............
(guarantees).
[[Page 3215]]
Total Current Funds .............. ......... B
Required.
------------------------------------------------------------------------
\1\ As determined by Licensee's management under its business plan.
Sec. 107.1510 How a Licensee computes Earmarked Profit (Loss).
Computing your Earmarked Profit (Loss) is the first step in
determining your obligations to pay Prioritized Payments and
Adjustments under Sec. 107.1520 and Profit Participation under
Sec. 107.1530.
(a) Requirement to compute your Earmarked Profit (Loss). While you
have Participating Securities outstanding or have Earmarked Assets (as
defined in paragraph (b) of this section), you must compute your
Earmarked Profit (Loss) for:
(1) Each full fiscal year.
(2) Any interim period (consisting of one or more fiscal quarters)
for which you want to make a Distribution.
(b) How to determine your Earmarked Assets. ``Earmarked Assets''
means all the Loans and Investments that you have when you issue
Participating Securities or that you acquire while you have
Participating Securities outstanding, and any non-cash assets that you
receive in exchange for such Loans and Investments.
(1) An Earmarked Asset remains earmarked until you dispose of it,
even if you no longer have any outstanding Participating Securities.
(2) Investments you make after redeeming all your Participating
Securities are not Earmarked Assets. However, if you issue new
Participating Securities, all of your Loans and Investments again
become Earmarked Assets.
(3) If you were licensed before March 31, 1993, you may be
permitted to exclude Loans and Investments held at that date from
Earmarked Assets under Sec. 107.1590.
(c) How to compute your Earmarked Asset Ratio. You must determine
your Earmarked Asset Ratio each time you compute Earmarked Profit
(Loss). If all your Loans and Investments are Earmarked Assets, your
Earmarked Asset Ratio equals 100 percent. Otherwise, compute your
Earmarked Asset Ratio using the following formula:
EAR = [(EA + P) / (LI + P)] x 100
where:
EAR = Earmarked Asset Ratio
EA = Weighted average Earmarked Assets (at cost) for the fiscal year or
interim period
P = Weighted average uninvested proceeds of Participating Securities
for the fiscal year or interim period
LI = Weighted average Loans and Investments (at cost) for the fiscal
year or interim period
(d) How to compute your Earmarked Profit (Loss) if Earmarked Asset
Ratio is 100 percent. (1) (i) If your Earmarked Asset Ratio from
paragraph (b) of this section is 100 percent, use the following formula
to compute your Earmarked Profit (Loss):
EP = NI + IK + EME
where:
EP = Earmarked Profit (Loss)
NI = Net Income (Loss), as reported on SBA Form 468 except as otherwise
provided in this paragraph (d)(1)
IK = Unrealized Appreciation (Depreciation) on Earmarked Assets that
you are distributing as an In-Kind Distribution under Sec. 107.1580
EME = Excess Management Expenses
(ii) For the purpose of determining Net Income (Loss), user fees
and commitment fees paid to SBA and partnership syndication costs that
you incur must be capitalized and amortized on a straight-line basis
over five years.
(2) ``Excess Management Expenses'' are those that exceed the
following limit:
(i) For a full fiscal year, the limit is the lower of:
(A) 2.5 percent of your weighted average Combined Capital for the
year, plus $125,000 if Combined Capital is below $20,000,000; or
(B) Your Management Expenses approved by SBA.
(ii) For less than a full fiscal year, you must prorate the annual
amounts in paragraph (d)(2)(i) of this section to determine the limit.
(e) How to compute your Earmarked Profit (Loss) if Earmarked Asset
Ratio is less than 100 percent. If your Earmarked Asset Ratio is less
than 100 percent, compute your Earmarked Profit (Loss) as follows:
(1) Do the Earmarked Profit (Loss) computation in paragraph (d) of
this section.
(2) Subtract your net realized gain (loss) (as reported on SBA Form
468) on Loans and Investments that are not Earmarked Assets.
(3) Separate the result from paragraph (e)(2) of this section into:
(i) Net realized gain (loss) (as reported on SBA Form 468) on
Earmarked Assets (``EGL''); and
(ii) The remainder (``R'').
(4) Your Earmarked Profit (Loss) equals:
EGL + (R x Earmarked Asset Ratio)
(f) How to compute your cumulative Earmarked Profit (Loss). Sum
your Earmarked Profit (Loss) for all fiscal years and for any interim
period following the end of your last fiscal year. The total is your
cumulative Earmarked Profit (Loss), which you must use in the
Prioritized Payment computations under Sec. 107.1520.
Sec. 107.1520 How a Licensee computes and allocates Prioritized
Payments to SBA.
This section tells you how to compute Prioritized Payments and
Adjustments and determine the amounts you must pay. To distribute
Prioritized Payments, see Sec. 107.1540.
(a) How to compute Prioritized Payments and Adjustments. (1)
Prioritized Payments. For a full fiscal year, the Prioritized Payment
on an outstanding Participating Security equals the Redemption Price
times the Trust Certificate Rate. For a shorter period (one or more
fiscal quarters), you must prorate the annual Prioritized Payment.
(2) Adjustments. Compute Adjustments using paragraph (f) of this
section.
(b) Licensee's obligation to pay Prioritized Payments and
Adjustments. You are obligated to pay Prioritized Payments and
Adjustments only if you have profit as determined under paragraph (d)
of this section.
(1) Prioritized Payments that you must pay (or have already paid)
because you have sufficient profit are ``Earned Prioritized Payments''.
(2) Prioritized Payments that are not payable because you lack
sufficient profit are ``Accumulated Prioritized Payments''. Treat all
Prioritized Payment as ``Accumulated'' until they become ``Earned''
under this section.
(3) Adjustments are computed under paragraph (f) of this section
and are ``earned'' according to the same criteria applied to
Prioritized Payments.
[[Page 3216]]
(c) How to keep track of Prioritized Payments. You must establish
three accounts to record your Accumulated and Earned Prioritized
Payments.
(1) Accumulation Account. The Accumulation Account is a memorandum
account. Its balance represents your Accumulated Prioritized Payments
and unearned Adjustments.
(2) Distribution Account. The Distribution Account is a liability
account. Its balance represents your unpaid Earned Prioritized Payments
and earned Adjustments.
(3) Earned Payments Account. The Earned Payments Account is a
memorandum account. Each time you add to the Distribution Account
balance, add the same amount to the Earned Payments Account. Its
balance represents your total (paid and unpaid) Earned Prioritized
Payments and earned Adjustments.
(d) How to determine your profit for Prioritized Payment purposes.
As of the end of each fiscal year and any interim period (one or more
fiscal quarters) for which you want to make a Distribution:
(1) Bring the Accumulation Account up to date by adding to it all
Prioritized Payments through the end of the fiscal period.
(2) Determine your cumulative Earmarked Profit (Loss) under
Sec. 107.1510(e) and subtract your Earned Payments Account balance from
it. The result (if greater than zero) is your profit for the purposes
of this section; if zero or less, you have no profit.
(3) If you have a profit, continue with paragraph (e) of this
section. Otherwise, continue with paragraph (f) of this section.
(e) Allocating Prioritized Payments to the Distribution Account.
(1) If you have a profit under paragraph (d) of this section, determine
the lesser of:
(i) Your profit; or
(ii) The balance in your Accumulation Account.
(2) Subtract the result in paragraph (e)(1) of this section from
the Accumulation Account and add it to the Distribution Account.
(f) How to compute Adjustments. You must compute your Adjustments
as of the end of each fiscal year.
(1) Adjustments based on Accumulation Account balance. If you have
any balance in your Accumulation Account, determine your average
Accumulation Account balance for the fiscal year and multiply it by the
average of the Trust Certificate Rates for all the Participating
Securities poolings during such year.
(2) Adjustments based on Distribution Account balance. If you have
any balance in your Distribution Account after giving effect to any
Distribution that will be made on the first or second Payment Date
following your fiscal year end, do the computations in paragraph (f)(1)
of this section, substituting ``Distribution Account'' for
``Accumulation Account''.
(3) Add the amounts computed in this paragraph (f) to your
Accumulation Account balance.
(g) Licensee's obligation to pay Prioritized Payments after
redeeming Participating Securities. This paragraph (g) applies if you
have redeemed all your Participating Securities, but you still hold
Earmarked Assets and still have a balance in your Accumulation Account.
(1) You must continue to perform all the procedures in this
Sec. 107.1520 as of the end of each fiscal quarter. You must distribute
any Earned Prioritized Payments and earned Adjustments in accordance
with Sec. 107.1540.
(2) After you dispose of all your Earmarked Assets and make any
required Distributions in accordance with Sec. 107.1540, your
obligation to pay any remaining Accumulated Prioritized Payments and
unearned Adjustments will be extinguished.
Sec. 107.1530 How a Licensee computes SBA's Profit Participation.
This section tells you how to compute SBA's Profit Participation.
Profit Participation is included in the Distributions you make to SBA
under Secs. 107.1550 and 107.1560.
(a) How to compute Profit Participation. Profit Participation
equals your ``Base'' times your ``Profit Participation Rate'' (if the
Base is zero or less, you do not owe SBA Profit Participation). Compute
the Base using paragraph (c) of this section and the Profit
Participation Rate using paragraphs (d) through (g) of this section.
You must compute your Earmarked Profit (Loss) under Sec. 107.1510 and
your Prioritized Payments and Adjustments under Sec. 107.1520 before
you can compute Profit Participation.
(b) How to keep track of Profit Participation. You must establish a
Profit Participation Account to record your computations under this
section and payments under Secs. 107.1550 and 107.1560. Its balance
represents your unpaid Profit Participation.
(c) How to compute the Base. As of the end of each fiscal year and
any year-to-date interim period (one or more fiscal quarters) for which
you want to make a Distribution, compute your Base using the following
formula:
B = EP - PPA - UL
where:
B = Base
EP = Earmarked Profit (Loss) for the period from Sec. 107.1510
PPA = Prioritized Payments from Sec. 107.1520(a)(1) and Adjustments (if
applicable) from Sec. 107.1520(f)
UL = ``Unused Loss'' as determined in this paragraph (c).
(1) If you have never computed a Base before, or if the Base as of
the end of your last fiscal year (your ``Previous Base'') was zero or
greater, your Unused Loss is zero with the following exception: If, at
the end of your last fiscal year, you computed a negative result under
paragraph (h)(3) of this section, your Unused Loss equals that negative
result.
(2) If your Previous Base was less than zero, your Unused Loss
equals your Previous Base.
(d) How to compute the Profit Participation Rate. You must
determine your Profit Participation Rate each time you compute a Base
that is greater than zero. Compute the Rate by following the steps in
paragraphs (e) through (g) of this section.
(e) Compute the ``PLC ratio''. (1) General rule. The ``PLC ratio''
is the highest ratio of outstanding Participating Securities to
Leverageable Capital that you have ever attained.
(2) Exception. You may reduce the ratio computed under paragraph
(e)(1) of this section if you have increased your Leverageable Capital
above its highest previous level. The increase must have taken place at
least 120 days before the date as of which your Base is computed. In
addition, the increase must have been expressly provided for in a plan
of operations submitted to and approved by SBA in writing, or must be
the result of the takedown of commitments or the conversion of non-cash
assets that were included in your Private Capital. To reduce your PLC
ratio:
(i) Determine the increase in your Leverageable Capital over its
highest previous level.
(ii) Find your highest previous ratio of Participating Securities
to Leverageable Capital. If you have attained your highest ratio more
than once, with different numerators and denominators, choose the ratio
with the highest numerator.
(iii) Add the increase in Leverageable Capital to the denominator
of the ratio chosen in paragraph (e)(2)(ii)of this section, and divide
the numerator by the revised denominator. The result is your new PLC
ratio.
(3) Once you compute a PLC ratio under either paragraph (e)(1) or
(e)(2)of
[[Page 3217]]
this section, do not recompute it unless there has been a change in
your outstanding Participating Securities or your Leverageable Capital.
(4) Example.
----------------------------------------------------------------------------------------------------------------
Participating
Securities Leverageable A/B PLC Ratio
(A) Capital (B)
----------------------------------------------------------------------------------------------------------------
End of period 1.......................................... 1,000 1,000 1.00 1.00
End of period 2.......................................... 1,500 1,000 1.50 1.50
End of period 3.......................................... 1,200 900 1.33 1.50
End of period 4.......................................... 750 500 1.50 1.50
End of period 5.......................................... 750 1,500 0.50 1.00
----------------------------------------------------------------------------------------------------------------
Explanation of PLC Ratio calculation following increase in Leverageable Capital:
Step 1: Increase in Leverageable Capital over highest previous level=1,500 -1,000=500.
Step 2: Highest previous ratio of Participating Securities to Leverageable Capital=1.50 (attained two times, at
end of periods 2 and 4).
Step 3: Highest numerator associated with highest ratio=1,500 (at end of period 2); associated
denominator=1,000.
Step 4: Add the increase in Leverageable Capital (from step 1) to the denominator (from step 3):
500+1,000=1,500.
Step 5: Divide the numerator (from step 3) by the revised denominator (from step 4): 1,500/1,500=1.00.
(f) Compute the Profit Participation Rate (before indexing).
Compute the Profit Participation Rate (before indexing) using the table
in this paragraph (f). Then go to paragraph (g) of this section to
determine whether to index the Profit Participation Rate.
------------------------------------------------------------------------
If your PLC ratio is: Then your Profit Participation Rate is:
------------------------------------------------------------------------
1 or less...................... 9% x PLC Ratio.
More than 1.................... 9%+[3% x (PLC ratio-1)].
------------------------------------------------------------------------
(g) Indexing the Profit Participation Rate. The Profit
Participation Rate is indexed, up or down, to the yield-to-maturity on
Treasury bonds with a remaining term of ten (10) years (the ``Treasury
Rate''). You must perform the indexing procedures in this paragraph (g)
unless the Treasury Rate was exactly 8 percent on every date that you
issued Participating Securities.
(1) Licensees that have issued Participating Securities on only one
occasion. Determine the Treasury Rate for the date you issued your
Participating Security. Adjust the Profit Participation Rate from
paragraph (f) of this section by the percentage difference between the
Treasury Rate and 8 percent. For example, assume that you issued
Participating Securities when the Treasury Rate was 10 percent. The
percentage difference between 10 percent and 8 percent is 25 percent.
If you had a PLC ratio of 1, the Profit Participation Rate before
indexing would be 9 percent. You would increase this rate by 25
percent, giving you a Profit Participation Rate of 11.25 percent.
(2) Licensees that have issued Participating Securities on more
than one occasion. Determine the Treasury Rate for each of the dates
you issued Participating Securities.
(i) Compute an average of all such Treasury Rates, weighted to
reflect the dollar amount of each issuance (ignoring any redemptions)
and the number of days from the date of each issuance to the date as of
which you are computing the Profit Participation Rate.
Example to paragraph (g)(2)(i) of this section. If you issued $10
million of Participating Securities on the 60th day of Fiscal Year 1
when the Treasury Rate was 8 percent, and another $15 million on the
100th day of Fiscal Year 3 when the Treasury Rate was 10 percent, then
the weighted average Treasury Rate computed as of the end of Fiscal
Year 3 would be 8.55 percent. [Days elapsed since first issuance of
Participating Securities = 1,035; days elapsed since second issuance of
Participating Securities = 265; weighted amount of first issuance =
$10,000,000 x 1,035/1,035 = $10,000,000; weighted amount of second
issuance = $15,000,000 x 265/1035 = $3,840,579; weighted average
amount of Participating Securities issued = $10,000,000 + $3,840,579 =
$13,840,579; weighted average Treasury = {(.08 x $10,000,000) + (.10
x $3,840,579)} / $13,840,579 = 8.55%]
(ii) Adjust the Profit Participation Rate from paragraph (f) of
this section by the percentage difference between the weighted average
Treasury Rate and 8 percent. In the example given in paragraph
(g)(2)(i) of this section, if the PLC ratio were equal to 2, the Profit
Participation Rate for the fiscal year would be 12.83 percent.
[{((.0855 x .08) - .08) + 1} x .12 x 100 = 12.83%]
(h) Computing SBA's Profit Participation. If the Base from
paragraph (c) of this section is greater than zero, you must compute
SBA's Profit Participation as follows:
(1) Multiply the Base by the Profit Participation Rate to determine
the Profit Participation for the fiscal year or year-to-date interim
period.
(2) If your last Profit Participation computation was for an
interim period during the same fiscal year and used a higher Profit
Participation Rate than that used in paragraph (h)(1) of this section,
multiply the Base for that period by the Profit Participation Rate used
in paragraph (h)(1) of this section.
(3) Reduce the Profit Participation from paragraph (h)(1) of this
section by any amounts of Profit Participation that you distributed or
reserve for distribution to SBA, or its designated agent or Trustee,
for any previous interim period during the fiscal year, or by the
amount you computed in paragraph (h)(2) of this section, whichever is
less. If the result is less than zero, SBA's Profit Participation is
zero. If you obtain a negative result as of the end of your fiscal
year, you must add it to your Unused Loss the next time you compute
your Base under paragraph (c)(1) of this section.
(i) Allocation of Profit Participation. Before any Distribution and
in any case within 120 days following the end of your fiscal year, you
must add the amount of Profit Participation computed under this
Sec. 107.1530 to the Profit Participation Account. You must reserve
funds equal to this amount for distribution to SBA, or its designated
agent or Trustee; you may not reinvest these funds or use them for any
other purpose.
Sec. 107.1540 Distributions by Licensee--Prioritized Payments and
Adjustments.
After you compute Prioritized Payments and Adjustments under
Sec. 107.1520, you must distribute them in accordance with this
Sec. 107.1540.
(a) Requirement to distribute Prioritized Payments and Adjustments.
This paragraph (a) applies only if you satisfy the liquidity
requirement in Sec. 107.1505. All Distributions under this paragraph
(a) go to SBA or its designated agent or trustee.
(1) You must distribute the balance in your Distribution Account
from Sec. 107.1520 annually on the first or second Payment Date
following your fiscal year end, and on any date when you are making any
other Distribution.
[[Page 3218]]
(2) You may distribute all or part of the balance in your
Distribution Account on any Payment Date regardless of whether you are
making any other Distribution on that date.
(b) Additional requirement for Licensees with undistributed
Prioritized Payments. This paragraph (b) applies if you do not
distribute the full amount in your Distribution Account by the second
Payment Date following the end of your fiscal year. At the end of each
fiscal quarter, until you reduce the balance in your Distribution
Account to zero, you must:
(1) Do all the steps in Sec. 107.1520; and
(2) Distribute the balance in your Distribution Account on the next
Payment Date following the end of your fiscal quarter, provided you
satisfy the liquidity requirement in Sec. 107.1505.
Sec. 107.1550 Distributions by Licensee--permitted ``tax
Distributions'' to private investors and SBA.
If you have outstanding Participating Securities or Earmarked
Assets, and you are a limited partnership, ``S Corporation'', or
equivalent pass-through entity for tax purposes, you may make an annual
``tax Distribution'' to your investors, whether or not they have an
actual tax liability. SBA receives a share of any tax Distribution you
make. This section tells you when you may make a ``tax Distribution''
and how to compute it.
(a) Conditions for making a tax Distribution. You may make a tax
Distribution only if:
(1) You have paid all your Prioritized Payments and Adjustments, so
that the balance in both your Distribution Account and your
Accumulation Account is zero (see Sec. 107.1520).
(2) You satisfy the liquidity requirement in Sec. 107.1505.
(3) The tax Distribution does not exceed your Retained Earnings
Available for Distribution.
(4) The tax Distribution does not exceed the Maximum Tax Liability
from paragraph (b) of this section.
(b) How to compute the Maximum Tax Liability. (1) Compute your
Maximum Tax Liability for a full fiscal year only. Use the following
formula:
M = (TOI x HRO) + (TCG x HRC)
where:
M = Maximum Tax Liability.
TOI = Total ordinary income (less ordinary deductions) allocated to
your partners or shareholders for Federal income tax purposes.
HRO = The highest combined marginal Federal and State income tax
rates for corporations or individuals (whichever is higher), on
ordinary income.
TCG = Total capital gains allocated to your partners or shareholders
for Federal income tax purposes.
HRC = The highest combined marginal Federal and State income tax
rates for corporations or individuals (whichever is higher), on
capital gains.
(2) For purposes of this paragraph (b), the ``State income tax'' is
that of the State where your principal place of business is located.
(c) SBA's share of the tax Distribution. (1) SBA's percentage share
of the tax Distribution is equal to the Profit Participation Rate
computed under Sec. 107.1530.
(2) SBA may direct you to pay its share of the tax Distribution to
its designated agent or Trustee.
(3) SBA will apply its share of the tax Distribution to the Profit
Participation you owe SBA under Sec. 107.1530.
(d) Paying a tax Distribution. You may make a tax Distribution only
on the first or second Payment Date following the end of your fiscal
year or, if your fiscal year end is December 31, during the period
beginning March 1 and ending April 15.
Sec. 107.1560 Distributions by Licensee--required Distributions to
private investors and SBA.
You must make Distributions under this Sec. 107.1560 if you have
outstanding Participating Securities or Earmarked Assets and you
satisfy the conditions in paragraph (a) of this section. Distributions
under this section are determined as of the end of each fiscal year.
(a) Conditions for making Distributions. Distributions under this
section are subject to the following conditions:
(1) You must have paid all your Prioritized Payments and
Adjustments, so that the balance in both your Distribution Account and
your Accumulation Account is zero (see Secs. 107.1520 and 107.1540).
(2) You must have made any permitted tax Distribution that you
choose to make under Sec. 107.1550.
(3) You must satisfy the liquidity requirement in Sec. 107.1505.
(4) The amount you distribute under this section must not exceed
your Retained Earnings Available for Distribution.
(b) Total amount you must distribute. Unless SBA permits otherwise,
the total amount you must distribute equals the result (if greater than
zero) of the following computation:
(1) Your Retained Earnings Available for Distribution as of the end
of your fiscal year; minus
(2) All previous Distributions under this Sec. 107.1560 that were
applied as redemptions or repayments of Leverage; plus
(3) All previous Distributions under Sec. 107.1570(b) that reduced
your Retained Earnings Available for Distribution.
(c) When you must make Distributions. You must make the required
Distributions on either the first or second Payment Date following the
end of your fiscal year.
(d) Effect of Distributions on Retained Earnings Available for
Distribution. Distributions under this Sec. 107.1560 have the following
effect on your Retained Earnings Available for Distribution:
(1) All Distributions to private investors reduce Retained Earnings
Available for Distribution.
(2) Distributions to SBA, or its designated agent or Trustee,
reduce Retained Earnings Available for Distribution if they are applied
as payments of Profit Participation or distributions on Preferred
Securities (see paragraph (g) of this section).
(3) Distributions to SBA, or its designated agent or Trustee, do
not reduce Retained Earnings Available for Distribution if they are
applied as a repayment or redemption of Leverage (see paragraph (g) of
this section).
(e) SBA's share of the total Distribution. Use the following table
to determine the percentage share of the total Distribution (from
paragraph (b) of this section) that goes to SBA (or its designated
agent or Trustee):
SBA's Percentage Share of Total Distribution
------------------------------------------------------------------------
If your ratio of Leverage to Leverageable Then SBA's percentage share
Capital as of the fiscal year end is: of the Distribution is:
------------------------------------------------------------------------
Over 200%................................. [Leverage / (Leverage +
Leverageable Capital)] x
100.
Over 100% but not over 200%............... 50%.
100% or less.............................. Profit Participation Rate
from Sec. 107.1530.
------------------------------------------------------------------------
(f) Exceptions to the Distribution requirement. (1) With SBA's
prior written approval, you may withhold from distribution reasonable
reserves necessary to protect your investments or relative position in
Loans and Investments and to meet contingent liabilities.
(i) If you submit a written request for SBA approval, you may
consider it approved unless SBA notifies you otherwise within 30 days
from receipt.
(ii) Reserves that you withhold from distribution may not be used
to make
[[Page 3219]]
investments in additional portfolio companies.
(iii) Withholding of reserves under this paragraph (f)(1) is not a
``payment failure'' in violation of Sec. 107.1820(e)(6).
(2) SBA may restrict Distributions under this Sec. 107.1560 if SBA
determines that the value of your assets is materially overstated. SBA
must give you notice of such a determination in advance of your
proposed Distribution.
(g) How SBA will apply your Distributions. Your Distributions to
SBA (or its designated agent or Trustee) under this Sec. 107.1560 will
be applied in the following order:
(1) First, to Profit Participation;
(2) Second, to the extent there remain any Retained Earnings
Available for Distribution, to distributions on Preferred Securities;
(3) Third, as a redemption of Participating Securities in order of
issue;
(4) Fourth, as a redemption of Preferred Securities; and
(5) Fifth, as the repayment of principal of any outstanding
Debentures, with such repayment to be made into escrow on terms and
conditions SBA determines.
Sec. 107.1570 Distributions by Licensee--optional Distribution to
private investors and SBA.
If you have outstanding Participating Securities or Earmarked
Assets, you may make two types of optional Distributions under this
Sec. 107.1570: quarterly Distributions determined the same way as the
required annual Distributions in Sec. 107.1560, and Distributions
allocated between SBA and your private investors in proportion to the
capital contributions of each.
(a) Quarterly Distributions subject to conditions in Sec. 107.1560.
(1) You may make Distributions under this paragraph (a) as of the end
of any fiscal quarter, giving SBA (or its designated agent or Trustee)
a percentage share determined under Sec. 107.1560(e).
(2) Such Distributions are subject to all the provisions in
Sec. 107.1560(a)(1), (a)(3), (a)(4), (d), (f)(2), and (g).
(3) You may make such Distributions only on the next Payment Date
following the end of your fiscal quarter.
(4) The total amount of such Distributions may not exceed the
result of the following computation:
(i) Your Retained Earnings Available for Distribution as of the end
of your fiscal quarter; minus
(ii) All previous Distributions under this paragraph (a) or
Sec. 107.1560 that were applied as redemptions or repayments of
Leverage; plus
(iii) All previous Distributions under paragraph (b) of this
section that reduced your Retained Earnings Available for Distribution.
(b) Other optional Distributions. On any Payment Date, you may make
additional Distributions to your private investors and to SBA (or its
designated agent or Trustee) under this paragraph (b).
(1) Conditions for making Distribution. You may make a Distribution
under this paragraph (b) only if:
(i) You have distributed all Earned Prioritized Payments and earned
Adjustments, so that the balance in your Distribution Account is zero
(see Sec. 107.1520).
(ii) You have distributed all Profit Participation computed under
Sec. 107.1530 and made all required Distributions under Sec. 107.1560.
(iii) You satisfy the liquidity requirement in Sec. 107.1505 or
obtain SBA's prior written approval of the Distribution.
(iv) You do not have a condition of Capital Impairment.
(v) The Distribution does not reduce your Regulatory Capital
(excluding commitments from Institutional Investors) below the minimum
required under Sec. 107.210, unless SBA approves the reduction as part
of a plan of liquidation.
(vi) The Distribution does not cause you to have excess Leverage
contrary to section 303 of the Act.
(2) SBA's share of Distribution. (i) If your Capital Impairment
Percentage under Sec. 107.1840 is zero, SBA's percentage share of any
Distribution under this paragraph (b) equals:
[Leverage/(Leverage + Leverageable Capital)] x 100
In this formula, use Leverage and Leverageable Capital as of the
date of the Distribution, after giving effect to any Distribution
under Sec. 107.1560 and paragraph (a) of this section.
(ii) If your Capital Impairment Percentage under Sec. 107.1840 is
greater than zero, you must modify the formula in paragraph (b)(2)(i)
of this section by replacing Leverageable Capital with:
Leverageable Capital x (100% - CIP)
where ``CIP'' is your Capital Impairment Percentage or 100 percent,
whichever is less.
(3) How SBA will apply Distributions. Any amounts you distribute to
SBA, or its designated agent or Trustee, under this paragraph (b) will
be applied as a repayment or redemption of Leverage in the order set
forth in Sec. 107.1560 (g)(3) through (g)(5).
(4) Effect of Distributions on Retained Earnings Available for
Distribution. Any amounts you distribute to non-SBA investors under
this paragraph (b) must reduce your Retained Earnings Available for
Distribution to zero before reducing your Private Capital.
(5) Permitted exception to Sec. 107.585. You may make any
Distribution permitted by this paragraph (b), even if the result is a
reduction in your Regulatory Capital that would otherwise be prohibited
under Sec. 107.585.
Sec. 107.1580 Special rules for In-Kind Distributions by Licensees.
(a) In-Kind Distributions while Licensee has outstanding
Participating Securities. A Distribution under Secs. 107.1560 or
107.1570 may consist of securities (an ``In-Kind Distribution''). Such
a Distribution must satisfy the conditions in this paragraph (a).
(1) You may distribute only securities that are Publicly Traded and
Marketable at the time of the Distribution.
(2) You must distribute each security pro-rata to all investors and
to SBA or its designated agent or Trustee, based on the amounts that
each party would receive if the Distribution were in cash.
(3) You must impute a gain (loss) on each security being
distributed as if it were being sold, using the value of the security
as of the declaration date of the Distribution (if you are a Corporate
Licensee) or the distribution date (if you are a Partnership Licensee).
(4) You must deposit SBA's share of the securities being
distributed with the CRA, who will select a Disposition Agent (a person
who is knowledgeable about and proficient in the marketing of thinly
traded securities). As an alternative, if you agree, SBA may direct you
to dispose of its share. In this case, you must promptly remit the
proceeds to SBA.
(b) In-Kind Distributions after Licensee has redeemed all
Participating Securities. This paragraph (b) applies from the time you
redeem all your Participating Securities until you dispose of all your
Earmarked Assets.
(1) You may make an In-Kind Distribution of an Earmarked Asset only
if you pay SBA the lower of:
(i) An amount equal to the Unrealized Appreciation on the asset; or
(ii) The full amount of your Accumulated Prioritized Payments and
unpaid Adjustments.
(2) You must obtain SBA's prior written approval of any In-Kind
Distribution of an Earmarked Asset that is not Publicly Traded and
Marketable, specifically including approval of the valuation of the
asset.
Sec. 107.1590 Special rules for companies licensed on or before March
31, 1993.
This section applies to companies licensed on or before March 31,
1993
[[Page 3220]]
that apply to issue Participating Securities.
(a) Election to exclude pre-existing portfolio. You may choose to
exclude all (but not a portion) of your Loans and Investments as of
March 31, 1993, from classification as Earmarked Assets if:
(1) The proceeds of your first issuance of Participating Securities
are not used to refinance outstanding Debentures (see paragraph (c) of
this section). SBA will consider payment or prepayment of any
outstanding Debenture to be a refinancing unless you demonstrate to
SBA's satisfaction that you can pay the Debenture principal without
relying on the proceeds of the Participating Securities.
(2) SBA, in its sole discretion, approves the exclusion.
(b) Treatment of pre-existing portfolio if not excluded. If you do
not choose to exclude your Loans and Investments as of March 31, 1993,
they will be Earmarked Assets for all purposes.
(c) Refinancing Debentures with Participating Securities. SBA may
permit you to use the proceeds of a Participating Security to pay the
principal amount due on an outstanding Debenture if:
(1) You have outstanding Equity Capital Investments (at cost) equal
to the amount of the Debentures being refinanced.
(2) You have not elected to exclude Loans and Investments from
Earmarked Assets under paragraph (a) of this section.
(d) Requirements for Licensee's first issuance of Participating
Securities. When you apply for your first issuance of Participating
Securities, you must comply with the following:
(1) For each of your Loans and Investments, you must submit:
(i) The most recent annual report (or fiscal year-end financial
statements) and the most recent interim financial statements of the
Small Business; and
(ii) Your valuation reports on the Small Business, prepared as of
the end of each of your last three fiscal years. If you have applied
for Participating Securities on the basis of interim financial
statements, you must also submit a valuation report as of your interim
financial statement date.
(2) If you have negative Undistributed Net Realized Earnings and/or
a net Unrealized Loss on Securities Held, SBA may require you to
undergo a quasi-reorganization in accordance with generally accepted
accounting principles.
(3) If your financial statements accompanying the Participating
Securities application are for an interim period, you must have your
SBA-approved independent public accountant perform a limited-scope
audit of the statements. For purposes of this paragraph (d)(3),
``limited scope audit'' means auditing procedures sufficient to enable
the independent public accountant to express an opinion on the
Statement of Financial Position and the accompanying Schedule of Loans
and Investments.
Funding Leverage by Use of SBA-Guaranteed Trust Certificates (``TCs'')
Sec. 107.1600 SBA authority to issue and guarantee Trust Certificates.
(a) Authorization. Sections 321 (a) and (b) of the Act authorize
SBA or its CRA to issue TCs, and SBA to guarantee the timely payment of
the principal and interest thereon. Any guarantee by SBA of such TC is
limited to the principal and interest due on the Debentures or the
Redemption Price of and Prioritized Payments on Participating
Securities in any Trust or Pool backing such TC. The full faith and
credit of the United States is pledged to the payment of all amounts
due under the guarantee of any TC.
(b) Periodic exercise of authority. SBA will issue guarantees of
Debentures and Participating Securities under section 303 and of TCs
under section 321 of the Act at three month intervals, or at shorter
intervals, taking into account the amount and number of such guarantees
or TCs.
(c) SBA authority to arrange public or private fundings of
Leverage. SBA in its discretion may arrange for public or private
financing under its guarantee authority. Such financing arranged by SBA
may be accomplished by the sale of individual Debentures or
Participating Securities, aggregations of Debentures or Participating
Securities, or Pools or Trusts of Debentures or Participating
Securities.
(d) Pass-through provisions. TCs shall provide for a pass-through
to their holders of all amounts of principal and interest paid on the
Debentures, or the Redemption Price of and Prioritized Payments on the
Participating Securities, in the Pool or Trust against which they are
issued.
(e) Formation of a Pool or Trust holding Leverage Securities. SBA
shall approve the formation of each Pool or Trust. SBA may, in its
discretion, establish the size of the Pools and their composition, the
interest rate on the TCs issued against Trusts or Pools, fees,
discounts, premiums and other charges made in connection with the
Pools, Trusts, and TCs, and any other characteristics of a Pool or
Trust it deems appropriate.
Sec. 107.1610 Effect of prepayment or early redemption of Leverage on
a Trust Certificate.
(a) The rights, if any, of a Licensee to prepay any Debenture or
make early redemption of any Participating Security are established by
the terms of such securities, and no such right is created or denied by
the regulations in this part.
(b) SBA's rights to purchase or prepay any Debenture without
premium are established by the terms of the Guaranty Agreement relating
to the Debenture. SBA's rights to redeem, at any time, any
Participating Security without premium are established by the terms of
the Guaranty Agreement relating to the Participating Security.
(c) Any prepayment of a Debenture or early redemption of a
Participating Security pursuant to the terms of the Guaranty Agreement
relating to such securities, shall reduce the SBA guarantee of timely
payment of principal and interest on a TC in proportion to the amount
of principal or Redemption Price that such prepaid Debenture or
redeemed Participating Security represents in the Trust or Pool backing
such TC.
(d) SBA shall be discharged from its guarantee obligation to the
holder or holders of any TC, or any successor or transferee of such
holder, to the extent of any such prepayment, whether or not such
successor or transferee shall have notice of any such prepayment.
(e) Interest on prepaid Debentures and Prioritized Payments on
Participating Securities shall accrue only through the date of such
voluntary prepayment or SBA payment, as the case may be.
(f) In the event that all Debentures or Participating Securities
constituting a Trust or Pool are prepaid, the TCs backed by such Trust
or Pool shall be redeemed by payment of the unpaid principal and
interest on the TCs; Provided, however, that in the case of the
prepayment of a Debenture pursuant to the provisions of the Guaranty
Agreement relating to the Debenture, the CRA shall pass through pro
rata to the holders of the TCs any such prepayments including any
prepayment penalty paid by the obligor Licensee pursuant to the terms
of the Debenture.
Sec. 107.1620 Functions of agents, including Central Registration
Agent, Selling Agent and Fiscal Agent.
(a) Agents. SBA will appoint or cause to be appointed agent(s) to
perform functions necessary to market and service Debentures,
Participating Securities, or TCs pursuant to this part.
(1) Selling Agent. As a condition of guaranteeing a Debenture or
[[Page 3221]]
Participating Security, SBA shall cause each Licensee to appoint a
Selling Agent to perform functions which include, but are not limited
to:
(i) Selecting qualified entities to become pool o
FR Doc. 96-1351 PART 107SMALL BUSINESS INVESTMENT COMPANIES
r Trust assemblers
(``Poolers'').
(ii) Receiving guaranteed Debentures and Participating Securities
as well as negotiating the terms and conditions of periodic offerings
of Debentures and/or TCs with Poolers on behalf of Licensees.
(iii) Directing and coordinating periodic sales of Debentures and
Participating Securities and/or TCs.
(iv) Arranging for the production of the Offering Circular,
certificates, and such other documents as may be required from time to
time.
(2) Fiscal Agent. SBA shall appoint a Fiscal Agent to:
(i) Establish performance criteria for Poolers.
(ii) Monitor and evaluate the financial markets to determine those
factors that will minimize or reduce the cost of funding Debentures or
Participating Securities.
(iii) Monitor the performance of the Selling Agent, Poolers, CRA,
and the Trustee.
(iv) Perform such other functions as SBA, from time to time, may
prescribe.
(3) Central Registration Agent. Pursuant to a contract entered into
with SBA, the CRA, as SBA's agent, will do the following with respect
to the Pools or Trust Certificates for the Debentures or Participating
Securities:
(i) Form an SBA-approved Pool or Trust;
(ii) Issue the TCs in the form prescribed by SBA;
(iii) Transfer the TCs upon the sale of original issue TCs in any
secondary market transaction;
(iv) Receive payments from Licensees;
(v) Make periodic payments as scheduled or required by the terms of
the TCs, and pay all amounts required to be paid upon prepayment of
Debentures or redemption of Participating Securities;
(vi) Hold, safeguard, and release all Debentures and Participating
Securities constituting Trusts or Pools upon instructions from SBA;
(vii) Remain custodian of such other documentation as SBA shall
direct by written instructions;
(viii) Provide for the registration of all pooled Debentures and
Participating Securities, all Pools and Trusts, and all TCs;
(ix) Perform such other functions as SBA may deem necessary to
implement the provisions of this section.
(b) Functions. The function of locating purchasers, and negotiating
and closing the sale of Debentures, Participating Securities and TCs,
may be performed either by SBA or an agent appointed by SBA. Nothing in
the regulations in this part shall be interpreted to prevent the CRA
from acting as SBA's agent for this purpose.
Sec. 107.1630 SBA regulation of Brokers and Dealers and disclosure to
purchasers of Leverage or Trust Certificates.
(a) Disclosure to purchasers. Prior to any sale of a Debenture,
Participating Security, or TC, SBA shall require the seller, or the
broker or dealer as agent for the seller, to disclose to the purchaser,
in a form prescribed or approved by SBA, specified information on the
terms, conditions, and yield of such instrument.
(b) Brokers and Dealers. Each broker, dealer, and Pool or Trust
assembler approved by SBA pursuant to these regulations shall either be
regulated by a Federal financial regulatory agency, or be a member of
the National Association of Securities Dealers (NASD), and shall be in
good standing in respect to compliance with the financial, ethical, and
reporting requirements of such body. They also shall be in good
standing with SBA as determined by the SBA Associate Administrator for
Investment (see paragraph (d) of this section) and shall provide a
fidelity bond or insurance in such amount as SBA may require.
(c) Suspension and/or termination of Broker or Dealer. SBA shall
exclude from the sale and all other dealings in Debentures,
Participating Securities or TCs any broker or dealer:
(1) If such broker's or dealer's authority to engage in the
securities business has been revoked or suspended by a supervisory
agency. When such authority has been suspended, such broker or dealer
will be suspended by SBA for the duration of such suspension by the
supervisory agency.
(2) If such broker or dealer has been indicted or otherwise
formally charged with a misdemeanor or felony bearing on its fitness,
such broker or dealer may be suspended while the charge is pending.
Upon conviction, participation may be terminated.
(3) If such broker or dealer has suffered an adverse final civil
judgment, holding that such broker or dealer has committed a breach of
trust or violation of law or regulation protecting the integrity of
business transactions or relationships, participation in the market for
Debentures, Participating Securities or TCs may be terminated.
(4) If such broker or dealer has failed to make full disclosure of
the information required by SBA in paragraph (a) of this section, such
broker's or dealer's participation in the market for Debentures,
Participating Securities or TCs may be terminated.
(d) Termination/suspension proceedings. A broker's or dealer's
participation in the market for Debentures, Participating Securities or
TCs will be conducted in accordance with Part 134 of this chapter. SBA
may, for any of the reasons stated in paragraphs (b)(1) through (b)(4)
of this section, suspend the privilege of any broker or dealer to
participate in this market. SBA shall give written notice at least ten
(10) business days prior to the effective date of such suspension. Such
notice shall inform the broker or dealer of the opportunity for a
hearing pursuant to part 134 of this chapter.
Sec. 107.1640 SBA access to records of the CRA, Brokers, Dealers and
Pool or Trust assemblers.
The CRA and any broker, dealer and Pool or Trust assembler
operating under the regulations in this part shall make all books,
records and related materials associated with Debentures, Participating
Securities and TCs available to SBA for review and copying purposes.
Such access shall be at such party's primary place of business during
normal business hours.
Miscellaneous
Sec. 107.1700 Transfer by SBA of its interest in Licensee's Leverage
security.
Upon such conditions and for such consideration as it deems
reasonable, SBA may sell, assign, transfer, or otherwise dispose of any
Preferred Security, Debenture, Participating Security, or other
security held by or on behalf of SBA in connection with Leverage. Upon
notice by SBA, Licensee will make all payments of principal, dividends,
interest, Prioritized Payments, and redemptions as shall be directed by
SBA. Licensee will be liable for all damage or loss which SBA may
sustain by reason of such disposal, up to the amount of Licensee's
liability under such security, plus court costs and reasonable
attorney's fees incurred by SBA.
Sec. 107.1710 SBA authority to collect or compromise its claims.
SBA may, upon such conditions and for such consideration as it
deems reasonable, collect or compromise all claims relating to
Preferred or Participating Securities or obligations held or guaranteed
by SBA, and all legal or equitable rights accruing to SBA.
[[Page 3222]]
Subpart J--Licensee's Noncompliance With Terms of Leverage
Sec. 107.1800 Licensee's agreement to terms and conditions in
Secs. 107.1810 and 107.1820.
Any Licensee that violates the terms and conditions of its Leverage
is subject to SBA remedies. The terms, conditions and remedies in
Sec. 107.1810 apply to outstanding Debentures issued after April 25,
1994. The terms, conditions and remedies in Sec. 107.1820 apply to
outstanding Preferred Securities and Participating Securities issued
after April 25, 1994, or if you have Earmarked Assets in your
portfolio.
Sec. 107.1810 Events of default and SBA's remedies for Licensee's
noncompliance with terms of Debentures.
(a) Applicability of this section. This Sec. 107.1810 applies to
Debentures issued after April 25, 1994. By issuing such Debentures, you
automatically agree to the terms, conditions and remedies in this
section, as in effect at the time of issuance and as if fully set forth
in the Debentures. Debentures issued before April 25, 1994 continue to
be governed by the remedies in effect at the time of their issuance.
(b) Automatic events of default. The occurrence of one or more of
the events in this paragraph (b) causes the remedies in paragraph (c)
of this section to take effect immediately.
(1) Insolvency. You become equitably or legally insolvent.
(2) Voluntary assignment. You make a voluntary assignment for the
benefit of creditors without SBA's prior written approval.
(3) Bankruptcy. You file a petition to begin any bankruptcy or
reorganization proceeding, receivership, dissolution or other similar
creditors' rights proceeding, or such action is initiated against you
and is not dismissed within 60 days.
(c) SBA remedies for automatic events of default. Upon the
occurrence of one or more of the events in paragraph (b) of this
section:
(1) Without notice, presentation or demand, the entire indebtedness
evidenced by your Debentures, including accrued interest, and any other
amounts owed SBA with respect to your Debentures, is immediately due
and payable; and
(2) You automatically consent to the appointment of SBA or its
designee as your receiver under section 311(c) of the Act.
(d) Events of default with notice. For any occurrence (as
determined by SBA) of one or more of the events in this paragraph (d),
SBA may avail itself of one or more of the remedies in paragraph (e) of
this section.
(1) Fraud. You commit a fraudulent act which causes detriment to
SBA's position as a creditor or guarantor.
(2) Fraudulent transfers. You make any transfer or incur any
obligation that is fraudulent under the terms of 11 U.S.C. 548.
(3) Willful conflicts of interest. You willfully violate
Sec. 107.730.
(4) Willful non-compliance. You willfully violate one or more of
the substantive provisions of the Act, specifically including but not
limited to the provisions summarized in section 310(c) of the Act, or
any substantive regulation promulgated under the Act.
(5) Repeated Events of Default. At any time after being notified by
SBA of the occurrence of an event of default under paragraph (f) of
this section, you engage in similar behavior which results in another
occurrence of the same event of default.
(6) Transfer of Control. You violate Sec. 107.475 and/or willfully
violate Sec. 107.410, and as a result of such violation you undergo a
transfer of Control.
(7) Non-cooperation under Sec. 107.1810(h). You fail to take
appropriate steps, satisfactory to SBA, to accomplish any action SBA
may have required under paragraph (h) of this section.
(8) Non-notification of Events of Default. You fail to notify SBA
as soon as you know or reasonably should have known that any event of
default exists under this section.
(9) Non-notification of defaults to others. You fail to notify SBA
in writing within ten days from the date of a declaration of an event
of default or nonperformance under any note, debenture or indebtedness
of yours, issued to or held by anyone other than SBA.
(e) SBA remedies for events of default with notice. Upon written
notice to you of the occurrence (as determined by SBA) of one or more
of the events in paragraph (d) of this section:
(1) SBA may declare the entire indebtedness evidenced by your
Debentures, including accrued interest, and/or any other amounts owed
SBA with respect to your Debentures, immediately due and payable; and
(2) SBA may avail itself of any remedy available under the Act,
specifically including institution of proceedings for the appointment
of SBA or its designee as your receiver under section 311(c) of the
Act.
(f) Events of default with opportunity to cure. For any occurrence
(as determined by SBA) of one or more of the events in this paragraph
(f), SBA may avail itself of one or more of the remedies in paragraph
(g) of this section.
(1) Excessive Management Expenses. Without the prior written
consent of SBA, you incur Management Expenses in excess of those
permitted under Sec. 107.520.
(2) Improper Distributions. You make any Distribution to your
shareholders or partners, except with the prior written consent of SBA,
other than:
(i) Distributions permitted under Sec. 107.585;
(ii) Payments from Retained Earnings Available for Distribution
based on either the shareholders' pro-rata interests or the provisions
for profit distributions in your partnership agreement, as appropriate;
and
(iii) Distributions by Participating Securities issuers as
permitted under Secs. 107.1540 through 107.1580.
(3) Failure to make payment. Unless otherwise approved by SBA, you
fail to make timely payment of any amount due under any security or
obligation of yours that is issued to, held or guaranteed by SBA.
(4) Failure to maintain Regulatory Capital. You fail to maintain
the minimum Regulatory Capital required under these regulations or,
without the prior written consent of SBA, you reduce your Regulatory
Capital, except as permitted by Secs. 107.585 and 107.1560 through
107.1580.
(5) Capital Impairment. You have a condition of Capital Impairment
as determined under Sec. 107.1830.
(6) Cross-default. An obligation of yours that is greater than
$100,000 becomes due or payable (with or without notice) before its
stated maturity date, for any reason including your failure to pay any
amount when due. This provision does not apply if you pay the amount
due within any applicable grace period or contest the payment of the
obligation in good faith by appropriate proceedings.
(7) Nonperformance. You violate or fail to perform one or more of
the terms and conditions of any security or obligation of yours that is
issued to, held or guaranteed by SBA, or of any agreement with or
conditions imposed by SBA in its administration of the Act and the
regulations promulgated under the Act.
(8) Noncompliance. Except as otherwise provided in paragraph (d)(5)
of this section, SBA determines that you have violated one or more of
the substantive provisions of the Act, specifically including but not
limited to the provisions summarized in section 310(c) of the Act, or
any substantive regulation promulgated under the Act.
[[Page 3223]]
(9) Failure to maintain investment ratio. You fail to maintain the
investment ratio for Leverage in excess of 300 percent of Leverageable
Capital (see Secs. 107.1150(b)(2) and 107.1160(c)), if applicable to
you, as of the end of each fiscal year. In determining whether you have
maintained the ratio, SBA will disregard any prepayment, sale, or
disposition of Venture Capital Financing, any increase in Leverageable
Capital, and any receipt of additional Leverage, within 120 days prior
to the end of your fiscal year.
(10) Failure to maintain diversity. You fail to maintain diversity
between management and ownership as required by Sec. 107.150, if
applicable to you.
(g) SBA remedies for events of default with opportunity to cure.
(1) Upon written notice to you of the occurrence (as determined by SBA)
of one or more of the events of default in paragraph (f) of this
section, and subject to the conditions in paragraph (g)(2) of this
section:
(i) SBA may declare the entire indebtedness evidenced by your
Debentures, including accrued interest, and/or any other amounts owed
SBA with respect to your Debentures, immediately due and payable; and
(ii) SBA may avail itself of any remedy available under the Act,
specifically including institution of proceedings for the appointment
of SBA or its designee as your receiver under section 311(c) of the
Act.
(2) SBA may invoke the remedies in paragraph (g)(1) of this section
only if:
(i) It has given you at least 15 days to cure the default(s); and
(ii) You fail to cure the default(s) to SBA's satisfaction within
the allotted time.
(h) Repeated non-substantive violations. If you repeatedly fail to
comply with one or more of the non-substantive provisions of the Act or
any non-substantive regulation promulgated under the Act, SBA, after
written notification to you and until you cure such condition to SBA's
satisfaction, may deny you additional Leverage and/or require you to
take such actions as SBA may determine to be appropriate under the
circumstances.
(i) Consent to removal of officers, directors, or general partners
and/or appointment of receiver. The Articles of any Licensee issuing
Debentures after April 25, 1994 must include the following provisions
as a condition to the purchase or guarantee by SBA of such Leverage.
Upon the occurrence of any of the events specified in paragraphs (d)(1)
through (d)(6) or (f)(1) through (f)(3) of this section as determined
by SBA, SBA shall have the right, and your consent to SBA's exercise of
such right:
(1) With respect to a Corporate Licensee, upon written notice, to
require you to replace, with individuals approved by SBA, one or more
of your officers and/or such number of directors of your board of
directors as is sufficient to constitute a majority of such board; or
(2) With respect to a Partnership Licensee, upon written notice, to
require you to remove the person(s) responsible for such occurrence
and/or to remove the general partner of Licensee, which general partner
shall then be replaced in accordance with Licensee's Articles by a new
general partner approved by SBA; and/or
(3) With respect to either a Corporate or Partnership Licensee, to
obtain the appointment of SBA or its designee as your receiver under
section 311(c) of the Act for the purpose of continuing your
operations. The appointment of a receiver to liquidate a Licensee is
not within such consent, but is governed instead by the relevant
provisions of the Act.
Sec. 107.1820 Conditions affecting issuers of Preferred Securities
and/or Participating Securities.
(a) Applicability of this section. This section applies if you have
Preferred Securities issued after April 25, 1994, or if you issue
Participating Securities or have Earmarked Assets in your portfolio.
Your Articles must include the provisions of this Sec. 107.1820 as a
condition to SBA's purchase of Preferred Securities or guarantee of
Participating Securities and for as long as you own Earmarked Assets.
Preferred Securities issued before April 25, 1994 continue to be
governed by the remedies in effect at the time of their issuance.
(b) Removal Conditions. Upon the occurrence (as determined by SBA)
of any of the following conditions (``Removal Conditions''), SBA may
avail itself of one or more of the remedies in paragraph (d) of this
section:
(1) Insolvency or extreme Capital Impairment. You become equitably
or legally insolvent, or have a Capital Impairment Percentage of 100
percent or more (``extreme Capital Impairment'') and have not cured
such Capital Impairment within the time limits set by SBA in writing.
In this regard:
(i) You are not considered to have a condition of extreme Capital
Impairment during the first eight years following your first issuance
of Participating Securities.
(ii) This paragraph (b)(1) does not give you an additional
opportunity to cure if you have already had an opportunity to cure your
Capital Impairment under paragraph (e)(3) of this section.
(2) Voluntary assignment. You make a voluntary assignment for the
benefit of creditors.
(3) Bankruptcy. You begin any bankruptcy or reorganization
proceeding, receivership, dissolution or other similar creditors'
rights proceeding, or such action is initiated against you and is not
dismissed within 60 days.
(4) Transfer of Control. You violate Sec. 107.475 and/or willfully
violate Sec. 107.410, and such violation results in a transfer of
Control.
(5) Fraud. You commit a fraudulent act which causes serious
detriment to SBA's position as a guarantor or investor.
(6) Fraudulent transfers. You make any transfer or incur any
obligation that is fraudulent under the terms of 11 USC 548.
(c) Contingent Removal Conditions. Upon the occurrence (as
determined by SBA) of any of the following conditions (``Contingent
Removal Conditions''), SBA may avail itself of one or more of the
remedies in paragraph (d) of this section, but only if you fail to
remove the person(s) SBA identifies as responsible for such occurrence
and/or cure such occurrence to SBA's satisfaction within a time period
determined by SBA (but not less than 15 days):
(1) Willful conflicts of interest. You willfully violate
Sec. 107.730.
(2) Willful or repeated noncompliance. You willfully or repeatedly
violate one or more of the substantive provisions of the Act,
specifically including but not limited to the provisions summarized in
section 310(c) of the Act, or any substantive regulation promulgated
under the Act.
(3) Failure to comply with restrictions under paragraph f) of this
section. You fail to comply with the restrictions imposed by SBA under
paragraph (f) of this section.
(d) SBA remedies for Removal Conditions and Contingent Removal
Conditions. Upon the occurrence (as determined by SBA) of any Removal
Condition, or any Contingent Removal Condition accompanied by your
failure to act as set forth in paragraph (c) of this section, SBA has
the following rights, and you consent to SBA's exercise of any or all
of such rights:
(1) With respect to a Corporate Licensee, upon written notice, to
require you to replace, with individuals approved by SBA, one or more
of your officers and/or such number of directors as is sufficient to
constitute a majority of your board of directors; or
[[Page 3224]]
(2) With respect to a Partnership Licensee, upon written notice, to
require you to remove the person(s) responsible for such occurrence
and/or to remove your general partner, who shall then be replaced in
accordance with your Articles by a new general partner approved by SBA;
and/or
(3) With respect to either a Corporate or Partnership Licensee, to
the appointment of SBA or its designee as your receiver under section
311(c) of the Act for the purpose of continuing your operations. The
appointment of a receiver to liquidate a Licensee is not within such
consent, but is governed instead by the relevant provisions of the Act.
(e) Restricted Operations Conditions. Upon the occurrence (as
determined by SBA) of any of the following conditions (``Restricted
Operations Conditions''), SBA may avail itself of any of the remedies
in paragraph (f) of this section.
(1) Removal Conditions or Contingent Removal Conditions. Any
condition occurs which is listed in paragraphs (b) or (c) of this
section.
(2) Failure to maintain Regulatory Capital. You fail to maintain
the minimum Regulatory Capital required by this part.
(3) Capital or Liquidity Impairment. You have a condition of
Capital Impairment as determined under Sec. 107.1830 or, if applicable,
a condition of Liquidity Impairment as determined under Sec. 107.1505,
and you fail to cure the impairment within time limits set by SBA in
writing.
(4) Improper Distributions. You make any Distribution to your
shareholders or partners other than those permitted by Secs. 107.585
and 107.1560 through 107.1580.
(5) Excessive Management Expenses. Without the prior written
consent of SBA, you incur Management Expenses in excess of those
permitted under Sec. 107.520.
(6) Failure to make payment. You fail to pay any amounts due under
Preferred Securities or required by Secs. 107.1500 through 107.1590,
unless otherwise permitted by SBA.
(7) Noncompliance. Except as otherwise provided for in paragraphs
(c)(1) and (c)(2) of this section, SBA determines that you have failed
to comply with one or more of the substantive provisions of the Act,
specifically including but not limited to the provisions summarized in
section 310(c) of the Act, or any substantive regulation promulgated
under the Act.
(8) Failure to maintain diversity. You fail to maintain diversity
between management and ownership as required by Sec. 107.150, if
applicable to you.
(9) Failure to maintain investment ratios. You fail to maintain the
investment ratios or amounts required for Participating Securities
(Sec. 107.1500(b)(4)) or Leverage in excess of 300 percent of
Leverageable Capital (Sec. 107.1160(c)) or Preferred Securities in
excess of 100 percent of Leverageable Capital (Sec. 107.1160(d)), if
applicable to you, as of the end of each fiscal year. In determining
whether you have maintained the ratios or amounts, SBA will disregard
any prepayment, sale, or disposition of Equity Capital Investments or
Venture Capital Financings, as appropriate, any increase in
Leverageable Capital, and any receipt of additional Leverage, within
120 days prior to the end of your fiscal year.
(10) Nonperformance. You violate or fail to perform one or more of
the terms and conditions of any Participating Security or Preferred
Security or of any agreement with or condition imposed by SBA in its
administration of the Act and the regulations promulgated thereunder.
(11) Noncooperation under paragraph (g) of this section. You fail
to take appropriate steps, satisfactory to SBA, to accomplish such
action as SBA may have required under paragraph (g) of this section.
(f) SBA remedies for Restricted Operations Conditions. Upon the
occurrence of any Restricted Operations Condition, and until such
condition(s) are cured to SBA's satisfaction within a time period
determined by SBA (but not less than 15 days), upon written notice SBA
shall have the following rights, and you consent to SBA's exercise of
any or all of such rights:
(1) To prohibit you from making any additional investments except
for investments under legally binding commitments you entered into
before such notice and, subject to SBA's prior written approval,
investments that are necessary to protect your investments;
(2) Until all Leverage is redeemed and amounts due are paid, to
prohibit Distributions by you to any party other than SBA, its agent or
Trustee;
(3) To require all your commitments from investors to be funded at
the earliest time(s) permitted in accordance with your Articles; and
(4) To review and re-determine your approved Management Expenses.
(g) Repeated non-substantive violations. If you repeatedly fail to
comply with one or more of the non-substantive provisions of the Act or
any non-substantive regulation promulgated thereunder, SBA, after
written notification to you and until such condition is cured to SBA's
satisfaction, will deny you additional Leverage and/or require you to
take such actions as SBA may determine to be appropriate under the
circumstances.
Computation of Licensee's Capital Impairment
Sec. 107.1830 Licensee's Capital Impairment--definition and general
requirements.
(a) Applicability of this section. This Sec. 107.1830 applies to
you if you have any outstanding Leverage issued on or after April 25,
1994. If you only have outstanding Leverage issued before April 25,
1994, you must comply with paragraphs (e) and (f) of this section and
the Capital Impairment regulations in this part in effect when you
issued your Leverage.
(b) Significance of Capital Impairment condition. If you have a
condition of Capital Impairment, you are not in compliance with the
terms of your Leverage. As a result, SBA has the right to impose the
applicable remedies for noncompliance in Secs. 107.1810(g) and
107.1820(f).
(c) Definition of Capital Impairment condition. You have a
condition of Capital Impairment if your Capital Impairment Percentage,
as computed in Sec. 107.1840, exceeds:
(1) For Section 301(d) Licensees, 75 percent.
(2) For Section 301(c) Licensees, the appropriate percentage from
the following table:
[[Page 3225]]
Maximum Permitted Capital Impairment Percentages for Section 301(c) Licensees
----------------------------------------------------------------------------------------------------------------
Then your
maximum
permitted
If the percentage of equity capital investments And your ratio of outstanding leverage to capital
(at cost) in your portfolio is: leverageable capital is impairment
percentage
is
----------------------------------------------------------------------------------------------------------------
67%............................................. 100% or less..................................... 70
Over 100% but not over 200%...................... 60
Over 200%........................................ 50
At least 40% but under 67%...................... 100% or less..................................... 55
Over 100% but not over 200%...................... 50
Over 200%........................................ 40
Under 40%....................................... 100% or less..................................... 45
Over 100% but not over 200%...................... 40
Over 200%........................................ 35
----------------------------------------------------------------------------------------------------------------
(d) Phase-in of maximum permitted Capital Impairment Percentages
for Section 301(c) Licensees. If you are a Section 301(c) Licensee,
regardless of your maximum permitted Capital Impairment Percentage
under paragraph (c) of this section, you will not have a condition of
Capital Impairment if:
(1) Your Capital Impairment Percentage does not exceed 50 percent;
and
(2) You have not reached your first fiscal year end occurring after
April 25, 1995.
(e) Quarterly computation requirement and procedure. You must
determine whether you have a condition of Capital Impairment as of the
end of each fiscal quarter. You must notify SBA promptly if you are
capitally impaired.
(f) SBA's right to determine Licensee's Capital Impairment
condition. SBA may make its own determination of your Capital
Impairment condition at any time.
Sec. 107.1840 Computation of Licensee's Capital Impairment Percentage.
(a) General. This section contains the procedures you must use to
determine your Capital Impairment Percentage if you have outstanding
Leverage issued after April 25, 1994. You must compare your Capital
Impairment Percentage to the maximum permitted under Sec. 107.1830(c)
to determine whether you have a condition of Capital Impairment.
(b) Preliminary impairment test. If you satisfy the preliminary
impairment test, your Capital Impairment Percentage is zero and you do
not have to perform any more procedures in this Sec. 107.1840.
Otherwise, you must continue with paragraph (c) of this section. You
satisfy the test if the following amounts are both zero or greater:
(1) The sum of Undistributed Net Realized Earnings, as reported on
SBA Form 468, and Includible Non-Cash Gains.
(2) Unrealized Gain (Loss) on Securities Held.
(c) How to compute your Capital Impairment Percentage. (1) If you
have an Unrealized Gain on Securities Held, compute your Adjusted
Unrealized Gain using paragraph (d) of this section. If you have an
Unrealized Loss on Securities Held, continue with paragraph (c)(2)of
this Section.
(2) Add together your Undistributed Net Realized Earnings, your
Includible Non-cash Gains, and either your Unrealized Loss on
Securities Held or your Adjusted Unrealized Gain.
(3) If the sum in paragraph (c)(2) of this section is zero or
greater, your Capital Impairment Percentage is zero.
(4) If the sum in paragraph (c)(2) of this section is less than
zero, drop the negative sign, divide by your Regulatory Capital
(excluding Treasury Stock), and multiply by 100. The result is your
Capital Impairment Percentage.
(d) How to compute your Adjusted Unrealized Gain. (1) Subtract
Unrealized Depreciation from Unrealized Appreciation. This is your
``Net Appreciation''.
(2) Determine your Unrealized Appreciation on Publicly Traded and
Marketable securities. This is your ``Class 1 Appreciation''.
(3) Determine your Unrealized Appreciation on securities that are
not Publicly Traded and Marketable and meet the following criteria,
which must be substantiated to the satisfaction of SBA (this is your
``Class 2 Appreciation''):
(i) The Small Business that issued the security received a
significant subsequent equity financing by an investor whose objectives
were not primarily strategic and at a price that conclusively supports
the Unrealized Appreciation;
(ii) Such financing represents a substantial investment in the form
of an arm's length transaction by a sophisticated new investor in the
issuer's securities; and
(iii) Such financing occurred within 24 months of the date of the
Capital Impairment computation, or the Small Business' pre-tax cash
flow from operations for its most recent fiscal year was at least 10
percent of the Small Business' average contributed capital for such
fiscal year.
(4) Perform the appropriate computation from the following table:
Adjusted Unrealized Gain Before Estimated Tax Effects
------------------------------------------------------------------------
Then adjusted
If And unrealized gain
before taxes is
------------------------------------------------------------------------
Class 1 Appreciation Net Appreciation. Appreciation + + Appreciation) + (50%
Class 2 x Class 2
Appreciation Net
Appreciation.
Class 1 Appreciation Net Appreciation. Appreciation + Appreciation) +
Class 2 [(50% x (Net
Appreciation > Appreciation - Class
Net Appreciation. 1 Appreciation)].
Class 1 Appreciation > Net ................. 80% x Net
Appreciation. Appreciation.
------------------------------------------------------------------------
[[Page 3226]]
(5) Reduce the gain computed in paragraph (d)(4) of this section by
your estimate of related future income tax expense. Subject to any
adjustment required by paragraph (d)(6)of this section, the result is
your Adjusted Unrealized Gain for use in paragraph (c)(2) of this
section.
(6) If any securities that are the source of either Class 1 or
Class 2 Appreciation are pledged or encumbered in any way, you must
reduce the Adjusted Unrealized Gain computed in paragraph (d)(5) of
this section by the amount of the related borrowing or other
obligation, up to the amount of the Unrealized Appreciation on the
securities.
Sec. 107.1850 Exceptions to Capital Impairment provisions for
Licensees with outstanding Participating Securities.
The provisions in this Sec. 107.1850 apply only if at least two-
thirds of your outstanding Leverage consists of Participating
Securities, and at least two-thirds of your Loans and Investments (at
cost) consist of Equity Capital Investments.
(a) Forbearance period for Participating Securities issuers. During
the first forty-eight (48) months following your first issuance of
Participating Securities, you will not have a condition of Capital
Impairment if your Capital Impairment Percentage is below 85 percent.
(b) Extended forbearance period for early stage investors. If at
least two-thirds of your Loans and Investments (at cost) are in Start-
Up Financings, the forbearance period in paragraph (a) of this section
is extended to 60 months.
(c) Forbearance based on actions by Licensee. The provisions of
this paragraph (c) apply only during the fifth and sixth years
following your first issuance of Participating Securities. If your
Capital Impairment Percentage, as determined either by you or by SBA,
exceeds the maximum permitted under Sec. 107.1830(c) but is below 85
percent, you will not have a condition of Capital Impairment if you do
either of the following within thirty (30) days of such determination:
(1) Increase your Regulatory Capital by a cash contribution placed
in an escrow account or other account satisfactory to SBA, for its
benefit. The contribution must equal, during the fifth year, 15 percent
of your outstanding Leverage or, during the sixth year, 30 percent.
(2) Provide a guarantee, satisfactory to SBA and for its benefit,
for the amount of the cash contribution required in paragraph (c)(1) of
this section. SBA will credit any escrowed funds or guarantee received
in the fifth year toward the requirements for the sixth year.
(d) Conditions for forbearance under paragraph (c) of this section.
(1) You cannot count any funds placed in an escrow or other account
under paragraph (c) of this section as Leverageable Capital.
(2) Any fee and/or any claim to repayment by the party making the
capital contribution or by the guarantor must be deferred and
subordinate to all outstanding Leverage plus any unpaid Earned
Prioritized Payments and earned Adjustments.
(3) If there is an acceleration or mandatory redemption under
Sec. 107.1810 or Sec. 107.1820, any funds in the escrow account and/or
any guarantee received under paragraph (c) of this section will be
applied toward repaying any amounts due SBA.
(4) If you reduce your Capital Impairment Percentage to zero, SBA
will release and return any escrowed funds and/or any guarantee
received under paragraph (c) of this section.
Subpart K--Ending Operations as a Licensee
Sec. 107.1900 Surrender of license.
You may not surrender your license without SBA's prior written
approval. Your request for approval must be accompanied by an offer of
immediate repayment of all of your outstanding Leverage (including any
prepayment penalties thereon), or by a plan satisfactory to SBA for the
orderly liquidation of the Licensee.
Subpart L--Miscellaneous
Sec. 107.1910 Non-waiver of SBA's rights or terms of Leverage
security.
SBA's failure to exercise or delay in exercising any right or
remedy under the Act or the regulations in this part does not
constitute a waiver of such right or remedy. SBA's failure to require
you to perform any term or provision of your Leverage does not affect
SBA's right to enforce such term or provision. Similarly, SBA's waiver
of, or failure to enforce, any term or provision of your Leverage or of
any event or condition set forth in Secs. 107.1810 or 107.1820 does not
constitute a waiver of any succeeding breach of such term or provision
or condition.
Sec. 107.1920 Licensee's application for exemption from a regulation
in part 107.
You may file an application in writing with SBA to have a proposed
action exempted from any procedural or substantive requirement,
restriction, or prohibition to which it is subject under this part,
unless the provision is mandated by the Act. SBA may grant an exemption
for such applicant, conditionally or unconditionally, provided the
exemption would not be contrary to the purposes of the Act. Your
application must be accompanied by supporting evidence which
demonstrates to SBA's satisfaction that:
(a) The proposed action is fair and equitable; and
(b) The exemption requested is reasonably calculated to advance the
best interests of the SBIC program in a manner consonant with the
policy objectives of the Act and the regulations in this part.
Sec. 107.1930 Effect of changes in this part 107 on transactions
previously consummated.
The legality of a transaction covered by the regulations in this
part is governed by the regulations in this part in effect at the time
the transaction was consummated, regardless of later changes. Nothing
in this part bars SBA enforcement action with respect to any
transaction consummated in violation of provisions applicable at the
time, but no longer in effect.
Dated: January 22, 1996.
John T. Spotila,
Acting Administrator.
[FR Doc. 96-1351 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P
Complete official Federal Register PDF
FR Doc. 96-1348 Small Business Size Standards
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3280-3304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1348]
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards
AGENCY: Small Business Administration.
ACTION: Final rule.
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SUMMARY: In response to President Clinton's government-wide regulatory
reform initiative, the Small Business Administration (SBA) has
completed a page-by-page, line-by-line review of all of its existing
regulations. As a result, SBA is clarifying and streamlining its
regulations. This final rule improves the Agency's size program by
simplifying and clarifying language in the existing rules, conforming
these rules to present SBA policies and practices, and providing some
substantive modifications to streamline the delivery of services to the
public. The revised regulations will be more understandable and much
easier to use, and will reduce the number of sections comprising Part
121 from eighteen to thirteen. The rule improves language, but does not
change the existing size standards which apply to particular
industries.
EFFECTIVE DATE: This rule is effective on March 1, 1996.
FOR FURTHER INFORMATION CONTACT: John W. Klein, Chief Counsel for
Special Programs, Office of General Counsel, at (202) 205-6645.
SUPPLEMENTARY INFORMATION: On November 24, 1995, SBA published a
proposed rule in the Federal Register (60 FR 57982) to completely
revise its regulations governing the size determination program. SBA's
intent in finalizing that rule is to streamline the size standards
operation by simplifying and clarifying existing regulatory language
and by eliminating unnecessary, irrelevant, or obsolete provisions. The
final rule amends office titles to reflect a previous reorganization of
functions within the structure of SBA. SBA has attempted to rewrite
Part 121 in plain English in order to make the regulations more
readable and less confusing.
The proposed rule contained eligibility requirements for
organizations for the handicapped to receive awards of contracts set
aside for small business and procedures for filing protests regarding
the status of handicapped organizations (proposed Secs. 121.1201-
121.1206). Those sections have been removed from this final rule
because the authority for such eligibility has expired. As a
consequence, Secs. 121.1301-121.1305 of the proposed rule have been
renumbered as Secs. 121.1201-121.1205 in this final rule.
SBA received and considered 25 timely comments in response to the
proposed rule. The comments, as well as SBA's response to them, are
discussed below. Other than the changes identified below in response to
the comments and the elimination of proposed Secs. 121.1201-121.1206
(as discussed above), the regulatory text of Part 121 has not been
changed from the proposed rule. For a section by section analysis of
the revised Part 121 and SBA's rationale for any changes from the pre-
existing regulations, see the supplementary information published as
part of the proposed rule (60 FR 57982).
Analysis of Comments Received
SBA received and considered eight comments to the proposed text for
its affiliation regulation (proposed Sec. 121.103). Six of these
comments responded to the proposed exclusion from affiliation coverage
afforded certain private investors that are engaged in the business of
providing equity and/or debt financing to third parties. In addition to
the existing exclusion from affiliation for Small Business Investment
Companies (SBICs) and Development Companies, the proposed rule added an
exclusion, for purposes of SBIC assistance only, for concerns owned by
certain venture capital firms, pension funds, and charitable entities
exempt from federal taxation under Sec. 501(c) of the Internal Revenue
Code. The proposed rule imposed the same control limitations on these
investors as those imposed by SBA on SBICs under 13 CFR Part 107.
While the commenters supported SBA's intent to add an exclusion
from affiliation for the listed investors, they thought that the
proposal did not go far enough. One commenter agreed with the proposal
to include venture capital operating companies (VCOCs) in the list of
investors which would not be affiliated with applicant concerns, but
felt that limiting the exception to financial investors that
technically qualify as VCOCs might not achieve the desired goal. The
commenter pointed out that a fund which resembles a VCOC because it has
at least 50% of its portfolio in ``qualified venture capital
investments'' and it obtains and exercises certain ``management
rights'' with respect to those investments may nevertheless fail to
qualify as a VCOC if its first investment was a passive investment. The
commenter suggested that the affiliation exemption should be made
available to any investing company that (1) has 50% of its portfolio in
``qualified venture capital investments'' at the time size is
determined, or (2) would qualify as a VCOC but for its first
investment.
SBA has considered the suggestion but has decided to limit
Sec. 121.103(b)(5)(i) to VCOCs, as proposed. SBA understands that other
investors may exist whose investment goals, policies and activities are
[[Page 3281]]
identical to those of a VCOC, but who for one reason or another are not
considered VCOCs. However, to properly administer a regulation that
refers to the type of investments of a private entity would demand
resources far in excess of those available to SBA. If, on the other
hand, the private investor's status as a VCOC is the criteria for
exemption from affiliation, SBA examiners need look no farther than a
statement from the entity that it is a VCOC. SBA believes a statement
of this type is likely to be reliable, since any company that is a VCOC
is subject to certain requirements under Department of Labor
regulations.
Another commenter recommended that the exclusion from affiliation
be broadened to include any non-registered investment company
beneficially owned by less than 100 persons if such company's sales
literature or organization documents indicate that its principal
purpose is investment in securities rather than the operation of
commercial enterprises. The commenter felt that a concern that meets
the definition of an ``investment company'' under the Investment
Company Act of 1940, as amended (the 1940 Act), has the necessary
investment characteristics even though it is not registered under the
1940 Act due to the number of its beneficial owners. SBA agrees and has
added a new paragraph (vi) to Sec. 121.103(b)(5).
Three commenters argued that lack of control over the small concern
should not be a requirement for an investor to benefit from the
exclusion from affiliation. SBA disagrees. A small concern must be
independently owned and operated, in addition to being small, in order
to be eligible for SBIC assistance. See 15 USC 632 and 15 USC 662.
Generally, a business that is controlled by its large investors does
not satisfy this statutory requirement. In Part 107, however, SBA has
identified certain special circumstances under which SBICs are
permitted to assume control over a small concern. See 13 CFR
Sec. 107.865(c) and (d). In the proposed rule covering Part 121, SBA
proposed to extend those exceptions to the private firms listed in
Sec. 121.103(b)(5). SBA is finalizing that proposal, but would like to
clarify two points regarding the application of the control test to
those private investors:
First, ``control'' will be determined under Sec. 107.865, which
incorporates the definition of Control under Sec. 107.50. Second, the
requirement in Sec. 107.865(e) for an SBIC assuming temporary control
over a concern to file a control certification with SBA would not apply
to non-SBIC investors in the concern.
SBA is also taking this opportunity to correct a drafting error in
current Sec. 121.401(b), which was repeated in proposed
Sec. 121.103(b)(1). Both sections provide an unconditional exclusion
from the affiliation rules for the entities listed therein, and both
sections mention investment companies registered under the 1940 Act.
However, it was never SBA's intent to provide an exclusion from
affiliation for all investment companies registered under the 1940 Act.
The regulation was intended to cover only those registered investment
companies that are also SBICs. See 54 FR 52634 (December 21, 1989). In
the final rule adopted today, registered investment companies are
treated the same as non-registered investment companies--they will not
be considered affiliated with the applicant concern if they satisfy the
control test under Sec. 107.865. Registered investment companies are
listed under new Sec. 121.103(b)(5)(v) in the final rule.
Finally, one commenter recommended expanding the exclusion from
affiliation in Sec. 121.103(b)(5) to include all investors primarily
engaged in the business of providing equity and/or debt financing to
third parties. SBA believes that such an exclusion is too broad, and
does not adopt it in this final rule.
One commenter expressed concern that ``common facilities'' had been
eliminated as a separate basis for finding affiliation in the proposed
rule, and recommended that it be reinserted in the final rule. Although
the proposed rule eliminated ``common facilities'' as a separate basis
for finding affiliation, it was not SBA's intent to prohibit SBA from
considering all appropriate factors, including ``common facilities,''
in determining whether affiliation exists. Section 121.103(a)(2) lists
certain factors that may be considered by SBA in determining whether
affiliation exists. It states that SBA considers factors such as
ownership, management, and contractual relationships, but does not
intend that list to be exhaustive. SBA believes that the flexibility to
make an appropriate affiliation determination was in the proposed
regulation, and does not add another separate basis for finding
affiliation in this rule.
Another commenter objected to the language of proposed
Sec. 121.103(c)(1) that eliminated the ``presumption'' of control for
persons that own, control, or have the power to control 50 percent or
more of a concern's voting stock contained in the predecessor
regulation at Sec. 121.401(e)(1). The commenter felt that the
regulation should provide only for a presumption of control which can
be negated by specific facts in a particular case (e.g., person may own
over 50% of voting stock, but through voting agreements or proxies may
have divested control of the company). SBA disagrees. SBA believes that
a person owning 50 percent of a concern should be deemed to control
that concern regardless of any voting agreements. A person that has
voting control of 50 percent of a concern, even if he or she does not
own the stock associated with the voting rights, would also be deemed
to control the concern, but that does not do away with the interests
attendant to a 50 percent owner.
SBA received 12 comments to its proposed revision to the definition
of ``annual receipts'' (proposed Sec. 121.104). Ten commenters
enthusiastically supported the revision of annual receipts that
eliminated the requirement that businesses operating on a cash basis
maintain a separate set of accrual basis books. They noted that such a
change will reduce paper work and expense. No change in the final rule
is made to that provision.
One commenter strongly supported the exclusion from annual receipts
for amounts collected by another by a conference management services
provider. Again, SBA concurs, and no change is made in this final rule.
One commenter recommended that custom brokers (businesses that
collect customs duties and federal revenues) should be able to exclude
``pass-through'' amounts from their annual receipts in determining
their size. The commenter felt that this added income distorts their
status as a small business. Pass-through amounts for custom brokers was
not an issue before the public in SBA's November 24, 1995 proposed
rule. As such, SBA cannot add such an exclusion in this final rule. In
addition, SBA has not performed an analysis of this industry to
determine whether such an exclusion is warranted. In order for such a
review to be done, interested parties must submit a request to the
Assistant Administrator of SBA's Size Standards Staff in Washington,
DC.
Finally, SBA has clarified what the term ``receipts'' encompasses
in this final rule. There was some internal confusion that the proposed
rule would have required a double counting of certain amounts by
requiring the inclusion of ``gross or total income'' plus ``cost of
goods sold.'' No double counting was intended, nor will it occur under
this regulation. The terms ``total income,'' ``gross income,'' and
``cost of goods sold'' come directly from the definitions of those
terms as set forth in applicable Internal Revenue Service (IRS) Federal
tax return forms. For a corporation (IRS Form 1120, line 11), a
[[Page 3282]]
sub-chapter S corporation (IRS Form 1120S, line 6), or a partnership
(IRS Form 1065, line 8), the applicable term is ``total income.'' For a
sole proprietorship (Schedule C, IRS Form 1040, line 7), the applicable
term is ``gross income.'' To this amount, the ``cost of goods sold''
(IRS Form 1120, line 2; IRS Form 1120S, line 2; IRS Form 1065, line 2;
IRS Form 1040, Schedule C, line 4) is added to determine ``receipts''
for SBA purposes. SBA never intended to add ``cost of goods sold'' to
the ``gross receipts or sales'' figures identified in these IRS forms,
which would have resulted in some double counting.
One commenter believed that proposed Sec. 121.105(c) needed to be
clarified in the final rule. The proposed rule added that provision to
make it clear that if one entity is replaced by another having the same
assets and liabilities, the successor firm would not be treated as a
new entity for purposes of calculating annual receipts or employees.
SBA's regulations have historically required a concern that has
acquired or been acquired as an affiliate during the applicable
averaging period to include the receipts of both concerns in
determining size. See 13 CFR 121.402(e)(1) (1995). That provision is
retained in this final rule at Sec. 121.104(d). This new provision is
not intended to repeat that rule. It is intended to apply to the
situation where a business entity ceases and a ``new'' business entity
emerges with basically the same assets and liabilities as the previous
entity. In such a case, instead of treating the successor business
entity as a ``new'' concern, with Sec. 121.104((b)(2) or
Sec. 121.106(b)(3) applying as appropriate, the revenues or employees
of the predecessor concern will be counted for the full averaging
period. A business entity cannot reorganize and be able to avoid the
full application of SBA's size requirements.
One commenter recommended that the $6 million net worth and $2
million net income size standards for the Development Company program
should be increased for inflation because they have not changed since
their inception in 1980. The numerical value of specific size standards
was not an item proposed for change in the November 24, 1995 proposed
rule. As such, any change at this time would be contrary to the
requirements of the Administrative Procedures Act and inappropriate.
Anyone believing that specific size standards should be altered should
write to the Assistant Administrator of SBA's Size Standards Staff at
SBA's Headquarters, giving detailed reasons for the desired change.
Two commenters recommended that the reference to ``net worth'' in
proposed Sec. 121.301(b)(1) should be to ``tangible net worth,''
because items such as goodwill have no tangible value and should not be
taken into account during calculation of net worth for loan approval
purposes. SBA concurs and makes that revision in this final rule.
Four commenters opposed the elimination of a size standard
differential for Redevelopment Areas in the context of SBA financial
assistance (proposed Sec. 121.301(e)). They supported keeping the
differential for Redevelopment Areas for concerns seeking such
financial assistance. Alternatively, if the differential is eliminated,
they proposed increasing all receipt-based size standards by 25%. SBA
disagrees. The reason for the differential was to assist distressed
geographical areas needing development, not to increase all size
standards by 25% for purposes of SBA financial assistance. Because
Redevelopment Areas have become so common, however, that is effectively
what has occurred. In addition, unlike Labor Surplus Areas, which are
reviewed on a regular basis, a Redevelopment Area remains so designated
once it receives the designation. Thus, areas that are no longer
distressed remain eligible for the increased size standards. Given
these circumstances, SBA continues to believe that the Redevelopment
Area differential should be eliminated and the final rule reflects
that.
One commenter disagreed with the provision of Sec. 121.302
establishing size for financial assistance at the time the application
for assistance is received by SBA, stating that concerns do not make
applications directly to SBA. The commenter recommended that size
should be determined as of the date of the funding or commitment to
fund. SBA believes that the date of funding or commitment to fund is
too far along in the process to determine a concern's size. SBA should
not use its limited resources to determine loan-worthiness of a concern
that is ineligible to receive the financial assistance because of its
size. Thus, SBA believes that size must be determined when SBA starts
its analysis. That, however, may not occur when the application is
first received by SBA. Sometimes an application is not acted on
immediately because it is not complete. In response to this comment and
SBA's re-evaluation of its position, the final rule makes the date that
an application is accepted for processing by SBA as the date that a
concern's size is determined.
One commenter objected to the provision of proposed Sec. 121.304
which permits a business concern with an existing SBA loan to be
considered small for purposes of refinancing that loan even though it
exceeds the applicable size standard at the time of the refinancing.
This is a pre-existing SBA policy that was not changed by the November
24, 1995 proposed rule. That policy has existed for many years in order
to protect the Government's investment. SBA has added a sentence to
this section in this final rule to clarify that such refinancing would
occur only where SBA determines that it is necessary to protect the
Government's financial interest.
SBA received three comments regarding waivers to its
nonmanufacturer rule (Sec. 121.406(b)). One comment recommended that
the local SBA district office be empowered with the authority to
approve or disapprove requests for waivers of the non-manufacturer
rule. SBA disagrees. The statutory authority for such waivers is given
to SBA's Administrator. This authority has been delegated to SBA's
Associate Administrator for Government Contracting. While SBA has moved
more and more authority to local district offices wherever possible,
SBA believes that the authority to waive the nonmanufacturer rule needs
to remain at this level to ensure consistency and fairness in all SBA
offices.
Two commenters responded to SBA's proposed implementation of the
nonmanufacturer rule under Simplified Acquisition Procedures (SAP)
(proposed Sec. 121.406(d)). One commenter supported the provision as
written and applauded SBA's effort to consider the dilemma of regular
dealers, suppliers and distributors under SAP. The other commenter
recommended that the $25,000 ceiling below which a nonmanufacturer need
not supply the product of a small business (provided that the product
is manufactured or produced in the United States) should be increased
to $100,000. That commenter reasoned that the ceiling was $25,000 when
the Small Purchase amount was $25,000. Since SAP have replaced Small
Purchase Procedures and the threshold for SAP is $100,000, the
commenter believed that the nonmanufacturer ceiling should similarly be
raised to $100,000.
Existing SBA regulations (13 CFR 121.906 and 121.1106) implement
amendments made in 1988 to the Small Business Act (15 U.S.C.
637(a)(17)). Those regulations specify that to qualify for a small
business set-aside or section 8(a) procurement of a manufactured or
processed product, a small
[[Page 3283]]
nonmanufacturer must provide the product of a domestic small
manufacturer. Specifically, an offeror that is not the manufacturer of
the product (1) must itself be a small business concern, and (2) must
also supply a product manufactured by a domestic small business
concern. This requirement is commonly referred to as the
``nonmanufacturer rule.'' SBA may waive the nonmanufacturer rule if one
of the following conditions exists: (1) SBA determines that no small
business manufacturer can reasonably be expected to offer a product
meeting the specifications required by a solicitation (individual
waiver); or (2) SBA determines that no small business manufacturer of
an item is available to participate in the federal market generally
(class waiver).
On May 26, 1995 SBA published in the Federal Register (60 FR 27924)
a proposed rule that would require a small business dealer or
nonmanufacturer to provide the product of a small manufacturer on all
small business set-aside or section 8(a) supply contracts over $2,500,
including those processed under SAP. This proposed rule was not
finalized, and the comments received by SBA and further study of the
issue persuaded SBA that the May 26th proposed rule should not be
adopted as final. As indicated above, the section in the November 24th
proposed rule dealing with this issue resulted in only two comments.
SBA has decided to finalize the rule as proposed on November 24th. In
order to set forth its reasoning on this matter, SBA discusses below
the comments earlier received in response to its May 26th proposed
rule.
SBA's May 26th proposed rule would have extended the
nonmanufacturer rule to all procurements processed under the SAP
established by the Federal Acquisition Streamlining Act (FASA) of 1994.
SBA offered two alternatives to this proposal, and invited comments on
both along with the proposal. SBA's first alternative was to exempt
from the nonmanufacturer rule contracts of $100,000 or less. The second
alternative was to exempt contracts of $25,000 or less. (Contracts
below the micro-purchases level of $2,500 would be exempt regardless of
the approach in the proposed rule or either alternative.) This second
alternative was the one proposed as part of SBA's November 24, 1995
proposed revision to the entire Part 121.
After considering the forty comments received in response to the
May 26th proposed rule, as well as the two received in response to the
November 24th proposed rule, SBA has concluded that applying the
nonmanufacturer rule to all procurements reserved for small business,
including those handled under SAP, would place inappropriate and
substantial administrative burdens on a great number of small-dollar
value contracts. Given the large volume of contracts of $25,000 or less
(98 percent of procurement actions), contracting officers would likely
experience burdensome delays in order to identify small manufacturer
sources and to verify that small dealers were supplying the product of
domestic small manufacturers. The likely significant increase in
requests for waivers of the nonmanufacturer rule would overly burden
contracting agencies and the SBA, creating further delays in the
procurement process. SBA also has concluded that adoption of the
proposed rule could have an undesirable effect of diminishing
opportunities for small dealers in the federal market. For many
products purchased in small-dollar quantities, there often appears to
be few or no small business manufacturers participating in the federal
market. Consequently, many dealers who have been supplying the federal
government with products on contracts of $25,000 or less would, under
the May 26th proposed rule, not be eligible for an award of a set-aside
contract since they do not have or could not obtain products of a small
manufacturer.
At the same time, SBA strongly believes that an exemption from the
nonmanufacturer rule for contracts greater than $25,000 would have a
substantial damaging effect on domestic small manufacturers. In fiscal
years 1991 through 1993, small manufacturers averaged over $500 million
in set-aside and 8(a) contracts ranging between $25,000 and $100,000.
An exemption from the nonmanufacturer rule for these procurements would
potentially shift much of this contracting from small to large
manufacturers, and would defeat the very purpose of the nonmanufacturer
rule.
The selection of the $25,000 level for applying the nonmanufacturer
rule to contracts reserved for small business is consistent with the
threshold formerly established for small purchase procedures
(discontinued under FASA) and balances the important objectives of
simplifying the procurement process with continuing to ensure that most
of the benefits of procurements reserved for small business actually
flow to small business. Utilizing this threshold of $25,000 will
continue the level of competition between small and large manufacturers
that existed under small purchase procedures. A higher threshold would
introduce a new level of competition that would adversely affect small
manufacturing enterprises. At the same time, small business dealers
will continue to have the same level of contract opportunities at
$25,000 and below that they formerly had under small purchase
procedures. That is, they will continue to be able to provide the
products of large manufacturers on procurements of $25,000 or less.
Selecting this threshold will add no new requirements to the vast
majority of smaller-sized procurements.
SBA received 40 comments in response to the May 26th proposed rule.
Of the 40 comments, ten were from federal contracting activities, one
from a State University Economic Development Institute (EDI), 28 from
businesses (27 dealers and 1 manufacturer), and one was from a trade
association. All but one of the commenters opposed applying the
nonmanufacturer rule as the May 26th rule proposed to do. The one, a
federal contracting activity, indicated its commitment to supporting
the rule however implemented. Thirty-six commenters supported the first
alternative of the proposed rule (a $100,000 threshold), and three
indicated some support for the second alternative (a $25,000
threshold).
The ten federal contracting activities and one EDI that commented
on the proposed rule favored exempting procurements of $100,000 or less
from the nonmanufacturer rule. They believe that applying the rule to
all procurements reserved for small business will place additional
administrative burdens on contracting personnel, which is contrary to
the intent of FASA. They pointed out that the proposed policy could
result in a reluctance on the part of some contracting personnel to set
aside procurements for small business, thus actually reducing small
business participation and increasing government costs because of
lessened cost competitiveness. They also anticipated a need to request
more waivers, causing administrative burdens and processing delays at
the SBA. Two of the federal contracting activities indicated that they
would support retaining the $25,000 threshold as a practical
alternative to requiring the application of the nonmanufacturer rule to
all contracts over $2,500. The EDI's comments, while supporting some of
the above, more fully describe the effects of the proposed rule upon
small dealers and distributors. (SBA addresses the effects upon dealers
later in this discussion.)
SBA recognizes that these points are legitimate concerns of federal
procurement personnel with regard to
[[Page 3284]]
the proposed rule. Therefore, SBA has decided that the nonmanufacturer
rule shall apply only to those contracts set aside for small business
that are above $25,000. The exemption from the nonmanufacturer rule for
contracts processed under small purchase procedures of $25,000 and
below had proven quite workable in the past. SBA agrees that
establishing a $100,000 threshold for the nonmanufacturer rule would
certainly further simplify the procurement process and reduce the
administrative burden on contracting officers. However, this
administrative relief would come at significant expense to domestic
small manufacturers who have traditionally provided products in
response to procurements set aside for small business. With this final
rule, administrative burdens will be no more and no less than they had
been under small purchase procedures. Also, small business set-aside
opportunities would not be diminished as a result of extending the
nonmanufacturer rule to previously exempted procurements. SBA has
concluded that the adverse effect of a $100,000 threshold upon such a
significant part of the market for small manufacturers is not
appropriate, and that the $25,000 threshold strikes a proper balance
with the FASA goal of reducing administrative matters associated with
federal procurement.
To alleviate the potential delays in the procurement process by
applying the nonmanufacturer rule to procurements reserved for small
business, two federal contracting activities recommended that SBA
delegate waiver authority to contracting officers for these
procurements. The SBA does not agree with this recommendation.
Delegating this decision to literally thousands of contracting offices
would likely lead to an inconsistent application of the nonmanufacturer
rule. However, to address concerns regarding delays in the procurement
process, SBA will attempt to complete the processing of individual
waiver requests in connection with procurements processed under
simplified acquisition procedures within five (5) business days of the
receipt of a complete waiver request instead of the normal fifteen (15)
business days. Generally, a contracting office submits, and SBA
processes, a waiver request before it issues its solicitation. The
markedly reduced time involved should lessen significantly any direct
negative impact on small manufacturers or dealers or on the procurement
process.
All but one of the 28 business commenters and the sole trade
association commenting are associated with one affected industry,
namely military surplus aircraft parts, and all supported the adoption
of the $100,000 threshold. Firms in this industry purchase at auction
military surplus aircraft parts from the Department of Defense (DoD),
inventory them, and resell them to U.S. and friendly foreign military
services. Items they purchase are generally new and unused, and are
products almost exclusively of large manufacturers. As suppliers of
products they do not manufacture, they would be unable to compete on
small business set-aside and section 8(a) procurements if the
nonmanufacturer rule were applicable.
Uniformly these commenters favored adoption of the alternative that
would establish a $100,000 threshold instead of the proposed rule. They
stated that the May 26, 1995 proposal to apply the nonmanufacturer rule
to all procurements reserved for small business would harm small
dealers of military surplus aircraft parts by effectively rendering
them unable to compete on most procurements reserved for small
business. This diminished opportunity to compete would result because
there are few DoD approved small manufacturers of military aircraft
parts, and most procurements are below the $100,000 simplified
acquisition threshold. With few or no small manufacturers to supply
products for these dealers, more federal solicitations would likely
become open and unrestricted. On unrestricted procurements, these
dealers believe they are at a competitive disadvantage when placed into
direct competition with the same large manufacturers whose products
they would propose to supply. Therefore, they believe such an
application of the nonmanufacturer rule would in fact harm small
businesses, and benefit large defense contractors.
SBA shares the concern about the impact of the proposed rule on the
opportunities for small dealers in the federal market. As these
comments point out, as well as comments received from several of the
federal contracting activities, small dealers find it difficult to
comply with the nonmanufacturer rule on small-dollar contracts due to
the limited number of small manufacturer sources. To address this
concern, the final rule re-establishes an exemption of the
nonmanufacturer rule on contracts of $25,000 or less. The SBA, however,
does not believe that a higher threshold is in the best interests of
all small businesses.
As stated in this final rule as well as the May 26th proposed rule,
SBA is particularly concerned about the impact on small business
manufacturers of an exemption to the nonmanufacturer rule.
Participation of small business in the federal procurement of aircraft
parts offers an excellent example of the reasons for the SBA's
concerns. In fiscal year 1993, small manufacturers of aircraft parts
received direct awards of over $20 million in set-aside and 8(a)
contracts that ranged between $25,000 and $100,000. (This figure does
not include set-aside and 8(a) contracts for products that small
manufacturers provided through small dealers.) An exemption of the
nonmanufacturer rule to small business set-aside procurements between
$25,000 and $100,000 could significantly reduce the opportunities for
small business manufacturers. The SBA has found that a number of other
industries would be affected in a similar manner if the $100,000
threshold were adopted. In recognition of the business practices of
small dealers in the federal market, while at the same time protecting
opportunities for small manufacturers and ensuring that the substantial
value of small business set-asides flow to small business, the SBA
believes that this final rule is in the overall best interest of small
business.
The commenting membership of the association of dealers in military
surplus aircraft parts also emphasized the unique character of their
commodity, and they requested that it be treated as such. As a minimum
alternative to the proposed rule, they requested that SBA grant a class
waiver for military aircraft spare parts. As a response to this
alternative, the Agency notes that Secs. 121.1201-121.1205 of this
final rule provide the policies and procedures that apply to all class
waivers of the nonmanufacturer rule. SBA will consider a request for a
class waiver for military surplus aircraft parts that is submitted with
adequate support in accordance with the procedures laid out in the
preceding reference.
The only business commenter not associated with the military
surplus aircraft parts industry believes that the proposed rule would
be inconsistent with U.S. policy regarding free trade barriers with its
global trading partners. SBA disagrees. In accordance with the General
Agreement on Tariffs and Trade, the North American Free Trade Agreement
and the Canadian Free Trade Agreement, governments may establish
procurement preference programs to assist small business, and this rule
pertains to policies concerning the eligibility of business concerns
who may participate in U.S. small business procurement programs.
SBA received three comments to Sec. 121.603 of the November 24th
proposed rule. The first comment
[[Page 3285]]
recommended that the section be revised to include the time at which
size is determined for specific 8(a) subcontracts, believing that SBA
must have inadvertently omitted this requirement from the November 24th
proposed rule. That requirement was not omitted from the proposed rule,
but, rather, appeared in proposed Sec. 121.404. Proposed Sec. 121.401
stated that the requirements set forth in Secs. 121.401-121.412 applied
to procurement programs including SBA's Minority Enterprise Development
(i.e., the 8(a)) program. Proposed Sec. 121.404 set forth the time at
which size is determined for these procurement programs. While the time
at which size is determined for 8(a) subcontracts continues to be
contained in Sec. 121.404, the final rule adds a cross reference in
Sec. 121.603 to Sec. 121.404 for clarification.
The second comment believed that notification of size verification
by SBA (proposed Sec. 121.603(b)) is an unnecessary burden on SBA. SBA
believes that such notification is needed to ensure fairness and the
integrity of the program, and that any self-imposed burden is
outweighed by this benefit.
The last comment suggested that Sec. 121.603(c) be eliminated as
unnecessary and redundant. This provision does not appear elsewhere in
Part 121, and SBA believes that it is needed within the size provisions
specifically relating to the 8(a) program.
As part of the supplementary information to the November 24, 1995
proposed rule, SBA published a table of statutory and regulatory size
standards established by agencies other than SBA. That table is not
repeated in this final rule. Anyone with an interest in size standards
established by other agencies for specific programs within their
authority should consult the table published with the proposed rule. 60
FR 57982, 57988.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA believes that this final rule will have a significant impact on
a substantial number of small entities within the meaning of the
Regulatory Flexibility Act, 5 U.S.C. 601, et seq. In addition, this
rule constitutes a significant regulatory action for the purpose of
Executive Order 12866. A regulatory assessment and a regulatory
flexibility analysis follow:
(1) Description of Entities to Which This Rule Applies
This rule will primarily apply to small business nonmanufacturers
(wholesale trade and retail trade firms) and will allow them to furnish
the product of any manufacturer on procurements of $25,000 or less.
Also, small business manufacturers will have to compete on certain
procurements with small nonmanufacturers supplying products of large
manufacturers. The lack of detailed data on contracts of $25,000 or
less precludes an estimate of the number of small nonmanufacturers and
small manufacturers this rule will affect. However, comments on the
proposed rule suggest that a significantly greater number of small
nonmanufacturers will be impacted by this rule than small
manufacturers.
(2) Description of Potential Benefits of This Rule
The benefits of this rule are threefold. First, small business
nonmanufacturers will maintain the same procurement opportunities for
contracts of $25,000 and below as they had under small purchase
procedures. Although the amount of contracting cannot be estimated, it
does represent a significant proportion of the $7.9 billion awarded to
small businesses under small purchase procedures in FY 1993. Second,
small manufacturers will have the same or greater level of procurement
opportunities under the simplified acquisition threshold as they had
under small business set-aside and 8(a) procurements of $25,000 to
$100,000. As discussed in the proposed rule, small manufacturers have
received over $500 million annually in set-aside and 8(a) contracts
within this dollar range. Finally, administrative burdens to small
nonmanufacturers and contracting officers will be reduced since there
will be no need to determine the size status of a manufacturing source
on thousands of small-dollar contracts.
(3) Description of Potential Costs of This Rule
SBA believes there will be minimal costs to the federal government
by reserving procurements of $25,000 or less to small nonmanufacturers.
All small business set-aside and section 8(a) contracts are expected to
be awarded at no more than fair-market value. Contracting officers, who
determine that on a given procurement there will not be two or more
small businesses competitive in market price, quality and delivery, may
issue an unrestricted procurement. Therefore, there should be no
significant increased costs to the government.
(4) Description of the Potential Net Benefits of the Rule
SBA believes that the benefits to small business exceed any costs
to federal procurement as a result of this final rule. In the May 26th
proposed rule, SBA expressed its belief that small business
opportunities would be greater if small nonmanufacturers were required
to supply the product of a domestic small business manufacturer. In
light of the comments received, SBA has concluded that small
nonmanufacturers participate much more significantly in small-dollar
procurements than do small manufacturers. Thus, the net benefits of
this final rule to small dealers, in terms of federal contracting
opportunities for small business, would be substantially greater than
the net benefits to small manufacturers from the proposed rule.
(5) Legal Basis for This Rule
The legal basis for this rule is sections 3(a), 5(a), 8(a) and
15(a) of the Small Business Act, 15 U.S.C. 632(a), 634(b)(6), 637(a)
and 644(a).
(6) Federal Rules
There are no federal rules that duplicate, overlap or conflict with
this final rule. SBA has exclusive statutory jurisdiction in
establishing size standards. In establishing the $100,000 threshold for
simplified acquisition procedures under which all procurements are
reserved exclusively for small business, FASA did not address the
application of the nonmanufacturer rule.
(7) Significant Alternatives to This Rule
In compliance with the Regulatory Flexibility Act, SBA considered
two alternatives in its proposed rule of May 26, 1995. One alternative
is the proposed rule itself, which would have the nonmanufacturer rule
apply to all small business set-aside and section 8(a) procurements
over $2,500. In proposing that rule, SBA offered and requested comments
on two alternatives. The proposed rule, together with the alternatives,
are discussed in the ``Supplementary Information,'' above. SBA has
concluded for the reasons more fully presented above to adopt the
second alternative.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this final rule contains no new reporting or
recordkeeping requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
does
[[Page 3286]]
not have any federalism implications warranting the preparation of a
Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.
List of Subjects in 13 CFR Part 121
Government procurement, Government property, Grant programs--
business, Individuals with disabilities, Loan programs--business, Small
businesses.
Accordingly, pursuant to the authority set forth in sections 3(a)
and 5(b)(6) of the Small Business Act, 15 U.S.C. 632(a) and 634(b)(6),
SBA hereby revises part 121 of Title 13, Code of Federal Regulations
(CFR), to read as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
Subpart A--Size Eligibility Provisions and Standards
Provisions of General Applicability
Sec.
121.101 What are SBA size standards?
121.102 How does SBA establish size standards?
121.103 What is affiliation?
121.104 How does SBA calculate annual receipts?
121.105 How does SBA define ``business concern or concern''?
121.106 How does SBA calculate number of employees?
121.107 How does SBA determine a concern's ``primary industry''?
121.108 What are the penalties for misrepresentation of size
status?
Size Standards Used to Define Small Business Concerns
121.201 What size standards has SBA identified by Standard
Industrial Classification codes?
Size Eligibility Requirements for SBA Financial Assistance
121.301 What size standards are applicable to financial assistance
programs?
121.302 When does SBA determine the size status of an applicant?
121.303 What size procedures are used by SBA before it makes a
formal size determination?
121.304 What are the size requirements for refinancing an existing
SBA loan?
121.305 What size eligibility requirements exist for obtaining
business loans relating to particular procurements?
Size Eligibility Requirements for Government Procurement
121.401 What procurement programs are subject to size
determinations?
121.402 What size standards are applicable to procurement
assistance programs?
121.403 Are SBA size determinations and SIC code designations
binding on parties?
121.404 When does SBA determine the size status of a business
concern?
121.405 May a business concern self-certify its small business size
status?
121.406 How does a small business concern qualify to provide
manufactured products under small business set-aside or MED
procurements?
121.407 What are the size procedures for multiple item
procurements?
121.408 What are the size procedures for SBA's Certificate of
Competency Program?
121.409 What size standard applies in an unrestricted procurement
for Certificate of Competency purposes?
121.410 What are the size standards for SBA's Section 8(d)
Subcontracting Program?
121.411 What are the size procedures for SBA's Section 8(d)
Subcontracting Program?
121.412 What are the size procedures for partial small business
set-asides?
Size Eligibility Requirements for Sales or Lease of Government Property
121.501 What programs for sales or leases of Government property
are subject to size determinations?
121.502 What size standards are applicable to programs for sales or
leases of Government property?
121.503 Are SBA size determinations binding on parties?
121.504 When does SBA determine the size status of a business
concern?
121.505 What is the effect of a self-certification?
121.506 What definitions are important for sales or leases of
Government-owned timber?
121.507 What are the size standards and other requirements for the
purchase of Government-owned timber (other than Special Salvage
timber)?
121.508 What are the size standards and other requirements for the
purchase of Government-owned Special Salvage Timber?
121.509 What is the size standard for leasing of Government land
for coal mining?
121.510 What is the size standard for leasing of Government land
for uranium mining?
121.511 What is the size standard for buying Government-owned
petroleum?
121.512 What is the size standard for stockpile purchases?
Size Eligibility Requirements for the Minority Enterprise Development
(MED) Program
121.601 What is a small business for purposes of admission to SBA's
Minority Enterprise Development (MED) Program?
121.602 At what point in time must a MED applicant be small?
121.603 How does SBA determine whether a Participant is small for a
particular MED subcontract?
121.604 Are MED Participants considered small for purposes of other
SBA assistance?
Size Eligibility Requirements for the Small Business Innovation
Research (SBIR) Program
121.701 What SBIR programs are subject to size determinations?
121.702 What size standards are applicable to the SBIR programs?
121.703 Are formal size determinations binding on parties?
121.704 When does SBA determine the size status of a business
concern?
121.705 Must a business concern self-certify its size status?
Size Eligibility Requirements for Paying Reduced Patent Fees
121.801 May patent fees be reduced if a concern is small?
121.802 What size standards are applicable to the reduced patent
fees program?
121.803 Are formal size determinations binding on parties?
121.804 When does SBA determine the size status of a business
concern?
121.805 May a business concern self-certify its size status?
Size Eligibility Requirements for Compliance With Programs of Other
Agencies
121.901 Can other Government agencies obtain SBA size
determinations?
121.902 What size standards are applicable to programs of other
agencies?
121.903 When does SBA determine the size status of a business
concern?
Procedures for Size Protests and Requests for Formal Size
Determinations
121.1001 Who may initiate a size protest or a request for formal
size determination?
121.1002 Who makes a formal size determination?
121.1003 Where should a size protest be filed?
121.1004 What time limits apply to size protests?
121.1005 How must a protest be filed with the contracting officer?
121.1006 When will a size protest be referred to an SBA Government
Contracting Area Office?
121.1007 Must a protest of size status relate to a particular
procurement and be specific?
121.1008 What happens after SBA receives a size protest or a
request for a formal size determination?
121.1009 What are the procedures for making the size determination?
121.1010 How does a concern become recertified as a small business?
Appeals of Size Determinations and SIC Code Designations
121.1101 Are formal size determinations subject to appeal?
121.1102 Are SIC code designations subject to appeal?
121.1103 What are the procedures for appealing a SIC code
designation?
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Subpart B--Other Applicable Provisions
Waivers of the Nonmanufacturer Rule for Classes of Products and
Individual Contracts
121.1201 What is the Nonmanufacturer Rule?
121.1202 When will a waiver of the Nonmanufacturer Rule be granted
for a class of products?
121.1203 When will a waiver of the Nonmanufacturer Rule be granted
for an individual contract?
121.1204 What are the procedures for requesting and granting
waivers?
121.1205 How is a list of previously granted class waivers
obtained?
Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a) and 644(c); and
Pub. L. 102-486, 106 Stat. 2776, 3133.
Subpart A--Size Eligibility Provisions and Standards
Provisions of General Applicability
Sec. 121.101 What are SBA size standards?
SBA's size standards define whether a business entity is small and,
thus, eligible for Government programs and preferences reserved for
``small business'' concerns. Size standards have been established for
types of economic activity, or industry, generally under the Standard
Industrial Classification (SIC) System. The SIC System is described in
the ``Standard Industrial Classification Manual'' published by the
Office of Management and Budget, Executive Office of the President, and
sold by the U.S. Government Printing Office, Superintendent of
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. The SIC System
assigns four-digit SIC codes to all economic activity within ten major
divisions. Section 121.201 describes the size standards now
established. A full table matching a size standard with each four-digit
SIC code is also published annually by SBA in the Federal Register.
Sec. 121.102 How does SBA establish size standards?
(a) SBA considers economic characteristics comprising the structure
of an industry, including degree of competition, average firm size,
start-up costs and entry barriers, and distribution of firms by size.
It also considers technological changes, competition from other
industries, growth trends, historical activity within an industry,
unique factors occurring in the industry which may distinguish small
firms from other firms, and the objectives of its programs and the
impact on those programs of different size standard levels.
(b) As part of its review of a size standard, SBA will investigate
if any concern at or below a particular standard would be dominant in
the industry. SBA will take into consideration market share of a
concern and other appropriate factors which may allow a concern to
exercise a major controlling influence on a national basis in which a
number of business concerns are engaged. Size standards seek to ensure
that a concern that meets a specific size standard is not dominant in
its field of operation.
(c) Please address any requests to change existing size standards
or establish new ones for emerging industries to the Assistant
Administrator for Size Standards, Small Business Administration, 409
3rd Street, S.W., Washington, D.C. 20416.
Sec. 121.103 What is affiliation?
(a) General Principles of Affiliation. (1) Concerns are affiliates
of each other when one concern controls or has the power to control the
other, or a third party or parties controls or has the power to control
both.
(2) SBA considers factors such as ownership, management, previous
relationships with or ties to another concern, and contractual
relationships, in determining whether affiliation exists.
(3) Individuals or firms that have identical or substantially
identical business or economic interests, such as family members,
persons with common investments, or firms that are economically
dependent through contractual or other relationships, may be treated as
one party with such interests aggregated.
(4) SBA counts the receipts or employees of the concern whose size
is at issue and those of all its domestic and foreign affiliates,
regardless of whether the affiliates are organized for profit, in
determining the concern's size.
(b) Exclusion from affiliation coverage. (1) Business concerns
owned in whole or substantial part by investment companies licensed, or
development companies qualifying, under the Small Business Investment
Act of 1958, as amended, are not considered affiliates of such
investment companies or development companies.
(2) Business concerns owned and controlled by Indian Tribes, Alaska
Regional or Village Corporations organized pursuant to the Alaska
Native Claims Settlement Act (43 U.S.C. 1601), Native Hawaiian
Organizations, or Community Development Corporations authorized by 42
U.S.C. 9805 are not considered affiliates of such entities, or with
other concerns owned by these entities solely because of their common
ownership.
(3) Business concerns which are part of an SBA approved pool of
concerns for a joint program of research and development as authorized
by the Small Business Act are not affiliates of one another because of
the pool.
(4) Business concerns which lease employees from concerns primarily
engaged in leasing employees to other businesses are not affiliated
with the leasing company solely on the basis of a leasing agreement.
(5) For financial, management or technical assistance under the
Small Business Investment Company program, an applicant concern is not
affiliated with the investors listed in paragraphs (b)(5)(i) through
(vi) of this section if the investors do not control the concern except
under those circumstances set forth in Sec. 107.865(c) or (d) of this
chapter. For purposes of this paragraph (b)(5), ``control'' is
determined under Sec. 107.865 of this chapter.
(i) Venture capital operating companies, as defined in the U.S.
Department of Labor regulations found at 29 CFR 2510.3-101(d);
(ii) Employee benefit or pension plans established and maintained
by the Federal government or any state, or their political
subdivisions, or any agency or instrumentality thereof, for the benefit
of employees;
(iii) Employee benefit or pension plans within the meaning of the
Employee Retirement Income Security Act of 1974, as amended (29 U.S.C.
1001, et seq.);
(iv) Charitable trusts, foundations, endowments, or similar
organizations exempt from Federal income taxation under section 501(c)
of the Internal Revenue Code of 1986, as amended (26 U.S.C. 501(c));
(v) Investment companies registered under the Investment Company
Act of 1940, as amended (1940 Act) (15 U.S.C. 80a-1, et seq.); and
(vi) Investment companies, as defined under the 1940 Act, which are
not registered under the 1940 Act because they are beneficially owned
by less than 100 persons, if the company's sales literature or
organizational documents indicate that its principal purpose is
investment in securities rather than the operation of commercial
enterprises.
(6) A protege firm is not an affiliate of a mentor firm solely
because the protege firm receives assistance from the mentor firm under
Federal Mentor-Protege programs.
(c) Affiliation based on stock ownership. (1) A person is an
affiliate of a concern if the person owns or controls, or has the power
to control 50 percent or more of its voting stock, or a block of stock
which affords control because it is large compared to other outstanding
blocks of stock.
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(2) If two or more persons each owns, controls or has the power to
control less than 50 percent of the voting stock of a concern, with
minority holdings that are equal or approximately equal in size, but
the aggregate of these minority holdings is large as compared with any
other stock holding, each such person is presumed to be an affiliate of
the concern.
(d) Affiliation arising under stock options, convertible
debentures, and agreements to merge. Since stock options, convertible
debentures, and agreements to merge (including agreements in principle)
affect the power to control a concern, SBA treats them as though the
rights granted have been exercised (except that an affiliate cannot use
them to appear to terminate control over another concern before it
actually does so). SBA gives present effect to an agreement to merge or
sell stock whether such agreement is unconditional, conditional, or
finalized but unexecuted. Agreements to open or continue negotiations
towards the possibility of a merger or a sale of stock at some later
date are not considered ``agreements in principle'' and, thus, are not
given present effect.
(e) Affiliation based on common management. Affiliation arises
where one or more officers, directors or general partners controls the
board of directors and/or the management of another concern.
(f) Affiliation based on joint venture arrangements. (1) Parties to
a joint venture are affiliates if any one of them seeks SBA financial
assistance for use in connection with the joint venture.
(2) Concerns bidding on a particular procurement or property sale
as joint venturers are affiliated with each other with regard to
performance of that contract.
(3) A contractor and subcontractor are treated as joint venturers
if the ostensible subcontractor will perform primary and vital
requirements of a contract or if the prime contractor is unusually
reliant upon the ostensible subcontractor. All requirements of the
contract are considered in reviewing such relationship, including
contract management, technical responsibilities, and the percentage of
subcontracted work.
(4) For size purposes, a concern must include in its revenues its
proportionate share of joint venture receipts.
(g) Affiliation based on franchise and license agreements. The
restraints imposed on a franchisee or licensee by its franchise or
license agreement relating to standardized quality, advertising,
accounting format and other similar provisions, generally will not be
considered in determining whether the franchisor or licensor is
affiliated with the franchisee or licensee provided the franchisee or
licensee has the right to profit from its efforts and bears the risk of
loss commensurate with ownership. Affiliation may arise, however,
through other means, such as common ownership, common management or
excessive restrictions upon the sale of the franchise interest.
Sec. 121.104 How does SBA calculate annual receipts?
(a) Definitions. In determining annual receipts of a concern:
(1) Receipts means ``total income'' (or in the case of a sole
proprietorship, ``gross income'') plus the ``cost of goods sold'' as
these terms are defined or reported on Internal Revenue Service (IRS)
Federal tax return forms (Form 1120 for corporations; Form 1120S for
Subchapter S corporations; Form 1065 for partnerships; and Form 1040,
Schedule F for farm or Schedule C for other sole proprietorships).
However, the term receipts excludes net capital gains or losses, taxes
collected for and remitted to a taxing authority if included in gross
or total income, proceeds from the transactions between a concern and
its domestic or foreign affiliates (if also excluded from gross or
total income on a consolidated return filed with the IRS), and amounts
collected for another by a travel agent, real estate agent, advertising
agent, or conference management service provider.
(2) Completed fiscal year means a taxable year including any short
period. Taxable year and short period have the meaning attributed to
them by the IRS.
(3) Unless otherwise defined in this section, all terms shall have
the meaning attributed to them by the IRS.
(b) Period of measurement. (1) Annual receipts of a concern which
has been in business for 3 or more completed fiscal years means the
receipts of the concern over its last 3 completed fiscal years divided
by three.
(2) Annual receipts of a concern which has been in business for
less than 3 complete fiscal years means the receipts for the period the
concern has been in business divided by the number of weeks in
business, multiplied by 52.
(3) Annual receipts of a concern which has been in business 3 or
more complete fiscal years but has a short year as one of those years
means the receipts for the short year and the two full fiscal years
divided by the number of weeks in the short year and the two full
fiscal years, multiplied by 52.
(c) Use of information other than the Federal tax return. Where
other information gives SBA reason to regard Federal Income Tax returns
as false, SBA may base its size determination on such other
information.
(d) Annual receipts of affiliates. (1) If a concern has acquired an
affiliate or been acquired as an affiliate during the applicable
averaging period or before small business self-certification, the
annual receipts in determining size status include the receipts of both
firms. Furthermore, this aggregation applies for the entire applicable
period used in computing size rather than only for the period after the
affiliation arose. Receipts are determined for the concern and its
affiliates in accordance with paragraph (b) of this section even though
this may result in different periods being used to calculate annual
receipts.
(2) The annual receipts of a former affiliate are not included as
annual receipts if affiliation ceased before the date used for
determining size. This exclusion of annual receipts of a former
affiliate applies during the entire period used in computing size,
rather than only for the period after which the affiliation ceased .
Sec. 121.105 How does SBA define ``business concern or concern''?
(a) A business concern eligible for assistance from SBA as a small
business is a business entity organized for profit, with a place of
business located in the United States, and which operates primarily
within the United States or which makes a significant contribution to
the U.S. economy through payment of taxes or use of American products,
materials or labor.
(b) A business concern may be in the legal form of an individual
proprietorship, partnership, limited liability company, corporation,
joint venture, association, trust or cooperative, except that where the
form is a joint venture there can be no more than 49 percent
participation by foreign business entities in the joint venture.
(c) A firm will not be treated as a separate business concern if a
substantial portion of its assets and/or liabilities are the same as
those of a predecessor entity. In such a case, the annual receipts and
employees of the predecessor will be taken into account in determining
size.
Sec. 121.106 How does SBA calculate number of employees?
(a) Employees counted in determining size include all individuals
employed on a full-time, part-time, temporary, or other basis. SBA will
consider the totality of the circumstances, including factors relevant
for tax purposes, in
[[Page 3289]]
determining whether individuals are employees of the concern in
question.
(b) Where the size standard is number of employees, the method for
determining a concern's size includes the following principles:
(1) The average number of employees of the concern is used
(including the employees of its domestic and foreign affiliates) based
upon numbers of employees for each of the pay periods for the preceding
completed 12 calendar months.
(2) Part-time and temporary employees are counted the same as full-
time employees.
(3) If a concern has not been in business for 12 months, the
average number of employees is used for each of the pay periods during
which it has been in business.
(4) The treatment of employees of former affiliates or recently
acquired affiliates is the same as for size determinations using annual
receipts in Sec. 121.104(d).
Sec. 121.107 How does SBA determine a concern's ``primary industry''?
In determining the primary industry in which a concern or a concern
combined with its affiliates is engaged, SBA considers the distribution
of receipts, employees and costs of doing business among the different
industries in which business operations occurred for the most recently
completed fiscal year. SBA may also consider other factors, such as the
distribution of patents, contract awards, and assets.
Sec. 121.108 What are the penalties for misrepresentation of size
status?
In addition to other laws which may be applicable, section 16(d) of
the Small Business Act, 15 U.S.C. 645(d), provides severe criminal
penalties for knowingly misrepresenting the small business size status
of a concern in connection with procurement programs. Section 16(a) of
the Act also provides, in part, for criminal penalties for knowingly
making false statements or misrepresentations to SBA for the purpose of
influencing in any way the actions of the Agency.
Size Standards Used To Define Small Business Concerns
Sec. 121.201 What size standards has SBA identified by Standard
Industrial Classification codes?
The size standards described in this section apply to all SBA
programs unless otherwise specified. The size standards themselves are
expressed either in number of employees or annual receipts in millions
of dollars, unless otherwise specified. The number of employees or
annual receipts indicates the maximum allowed for a concern and its
affiliates to be considered small. The following is a listing of size
standards for industries under the SIC System. Size standards are
listed by Division and apply to all industries in that Division except
those specifically listed with separate size standards for a specific
two-digit major group or four-digit industry code. The industry code
applicable to an industry that cannot be otherwise classified will be
SIC code 9999, Nonclassifiable Establishments, with a corresponding
size standard of $5.0 million in annual receipts.
Size Standards by SIC Industry
------------------------------------------------------------------------
Size standards in number of
SIC code and description employees or millions of
dollars
------------------------------------------------------------------------
DIVISION A--AGRICULTURE
------------------------------------------------------------------------
MAJOR GROUP 01--AGRICULTURAL PRODUCTION $0.5
CROPS.
MAJOR GROUP 02--LIVESTOCK AND ANIMAL $0.5
SPECIALTIES.
Except:
0211 Beef Cattle Feedlots (Custom).... $0.5
0252 Chicken Eggs..................... $9.0
MAJOR GROUP 07--AGRICULTURAL SERVICES...... $5.0
MAJOR GROUP 08--FORESTRY................... $5.0
MAJOR GROUP 09--FISHING, HUNTING, AND $3.0
TRAPPING.
------------------------------------------------------------------------
DIVISION B--MININ
------------------------------------------------------------------------
MAJOR GROUP 10--METAL MINING............... $500
MAJOR GROUP 12--COAL MINING................ $500
MAJOR GROUP 13--OIL AND GAS EXTRACTION AND $500
MAJOR GROUP 14--MINING AND QUARRYING OF
NONMETALLIC MINERALS, EXCEPT FUELS.
EXCEPT:
1081 Metal Mining Services............ $5.0
1241 Coal Mining Services............. $5.0
1382 Oil and Gas Field Exploration $5.0
Services.
1389 Oil and Gas Field Services, $5.0
N.E.C..
1481 Nonmetallic Minerals Services, $5.0
Except Fuels.
------------------------------------------------------------------------
DIVISION C--CONSTRUCTION
------------------------------------------------------------------------
MAJOR GROUP 15--GENERAL BUILDING $17.0
CONTRACTORS.
MAJOR GROUP 16--HEAVY CONSTRUCTION, NON $17.0
BUILDING.
EXCEPT:
1629 (Part) Dredging and Surface $13.5 \1\
Cleanup Activities.
MAJOR GROUP 17--CONSTRUCTION--SPECIAL TRADE $7.0
CONTRACTORS.
------------------------------------------------------------------------
DIVISION D--MANUFACTURING,\2\.............. 500
------------------------------------------------------------------------
EXCEPT:
2032 Canned Specialties............... 1,000
[[Page 3290]]
2033 Canned Fruits, Vegetables, 500 \3\
Preserves, Jams and Jellies.
2043 Cereal Breakfast Foods........... 1,000
2046 Wet Corn Milling................. 750
2052 Cookies and Crackers............. 750
2062 Cane Sugar Refining.............. 750
2063 Beet Sugar....................... 750
2076 Vegetable Oil Mills, Except Corn, 1,000
Cottonseed, and Soybean.
2079 Shortening, Table Oils, 750
Margarine, and Other Edible Fats and
Oils, N.E.C.
2085 Distilled and Blended Liquors.... 750
2111 Cigarettes....................... 1,000
2211 Broadwoven Fabric Mills, Cotton.. 1,000
2261 Finishers of Broadwoven Fabrics 1,000
of Cotton.
2295 Coated Fabrics, Not Rubberized... 1,000
2296 Tire Cord and Fabrics............ 1,000
2611 Pulp Mills....................... 750
2621 Paper Mills...................... 750
2631 Paperboard Mills................. 750
2656 Sanitary Food Containers, Except 750
Folding.
2657 Folding Paperboard Boxes, 750
Including Sanitary.
2812 Alkalies and Chlorine............ 1,000
2813 Industrial Gases................. 1,000
2816 Inorganic Pigments............... 1,000
2819 Industrial Inorganic Chemicals, 1,000
N.E.C.
2821 Plastics Materials, Synthetic 750
Resins, and Nonvulcanizable Elastomers.
2822 Synthetic Rubber (Vulcanizable 1,000
Elastomers).
2823 Cellulosic Manmade Fibers........ 1,000
2824 Manmade Organic Fibers, Except 1,000
Cellulosic.
FR Doc. 96-1348 Small Business Size Standards
2833 Medicinal Chemicals and Botanical 750
Products.
2834 Pharmaceutical Preparations...... 750
2841 Soap and Other Detergents, Except 750
Specialty Cleaners.
2865 Cyclic Organic Crudes and 750
Intermediates, and Organic Dyes and
Pigments.
2869 Industrial Organic Chemicals, 1,000
N.E.C..
2873 Nitrogenous Fertilizers.......... 1,000
2892 Explosives....................... 750
2911 Petroleum Refining............... 1,500 \4\
2952 Asphalt Felts and Coatings....... 750
3011 Tires and Inner Tubes............ 1,000 \5\
3021 Rubber and Plastics Footwear..... 1,000
3211 Flat Glass....................... 1,000
3221 Glass Containers................. 750
3229 Pressed and Blown Glass and 750
Glassware, N.E.C.
3241 Cement, Hydraulic................ 750
3261 Vitreous China Plumbing Fixtures 750
and China and Earthenware Fittings and
Bathroom Accessories.
3275 Gypsum Products.................. 1,000
3292 Asbestos Products................ 750
3296 Mineral Wool..................... 750
3297 Nonclay Refractories............. 750
3312 Steel Works, Blast Furnaces 1,000
(Including Coke Ovens), and Rolling
Mills.
3313 Electrometallurgical Products, 750
Except Steel.
3315 Steel Wiredrawing and Steel Nails 1,000
and Spikes.
3316 Cold-Rolled Steel Sheet, Strip, 1,000
and Bars.
3317 Steel Pipe and Tubes............. 1,000
3331 Primary Smelting and Refining of 1,000
Copper.
3334 Primary Production of Aluminum... 1,000
3339 Primary Smelting and Refining of 750
Nonferrous Metals, Except Copper and
Aluminum.
3351 Rolling, Drawing, and Extruding 750
of Copper.
3353 Aluminum Sheet, Plate, and Foil.. 750
3354 Aluminum Extruded Products....... 750
3355 Aluminum Rolling and Drawing, 750
N.E.C.
3356 Rolling, Drawing, and Extruding 750
of Nonferrous Metals, Except Copper
and Aluminum.
3357 Drawing and Insulating of 1,000
Nonferrous Wire.
3398 Metal Heat Treating.............. 750
3399 Primary Metal Products, N.E.C.... 750
3411 Metal Cans....................... 1,000
3431 Enameled Iron and Metal Sanitary 750
Ware.
3482 Small Arms Ammunition............ 1,000
3483 Ammunition, Except for Small Arms 1,500
3484 Small Arms....................... 1,000
3511 Steam, Gas, and Hydraulic 1,000
Turbines, and Turbine Generator Set
Units.
[[Page 3291]]
3519 Internal Combustion Engines, 1,000
N.E.C.
3531 Construction Machinery and 750
Equipment.
3537 Industrial Trucks, Tractors, 750
Trailers, and Stackers.
3562 Ball and Roller Bearings......... 750
3571 Electronic Computers............. 1,000
3572 Computer Storage Devices......... 1,000
3575 Computer Terminals............... 1,000
3577 Computer Peripheral Equipment, 1,000
N.E.C.
3578 Calculating and Accounting 1,000
Machines, Except Electronic Computers.
3585 Air-Conditioning and Warm Air 750
Heating Equipment and Commercial and
Industrial Refrigeration Equipment.
3612 Power, Distribution, and 750
Specialty Transformers.
3613 Switchgear and Switchboard 750
Apparatus.
3621 Motors and Generators............ 1,000
3624 Carbon and Graphite Products..... 750
3625 Relays and Industrial Controls... 750
3631 Household Cooking Equipment...... 750
3632 Household Refrigerators and Home 1,000
and Farm Freezers.
3633 Household Laundry Equipment...... 1,000
3634 Electronic Housewares and Fans... 750
3635 Household Vacuum Cleaners........ 750
3641 Electric Lamp Bulbs and Tubes.... 1,000
3651 Household Audio and Video 750
Equipment.
3652 Phonograph Records and 750
Prerecorded Audio Tapes and Disks.
3661 Telephone and Telegraph Apparatus 1,000
3663 Radio and Television Broadcasting 750
and Communications Equipment.
3669 Communications Equipment, N.E.C.. 750
3671 Electron Tubes................... 750
3692 Primary Batteries, Dry and Wet... 1,000
3694 Electrical Equipment for Internal 750
Combustion Engines.
3695 Magnetic and Optical Recording 1,000
Media.
3699 Electrical Machinery, Equipment, 750
and Supplies, N.E.C.
3711 Motor Vehicles and Passenger Car 1,000
Bodies.
3714 Motor Vehicle Parts and 750
Accessories.
3716 Motor Homes...................... 1,000
3721 Aircraft......................... 1,500
3724 Aircraft Engines and Engine Parts 1,000
3728 Aircraft Parts and Auxiliary 1,000 \9\
Equipment, N.E.C.
3731 Shipbuilding and Repair of 1,000
Nuclear Propelled Ships.
Shipbuilding of Nonnuclear 1,000
Propelled Ships and Nonpropelled
Ships.
Ship Repair (Including Overhauls 1,000
and Conversions) Performed on
Nonnuclear Propelled and
Nonpropelled Ships East of the 108
Meridian.
Ship Repair (Including Overhauls 1,000
and Conversion) Performed on
Nonnuclear Propelled and
Nonpropelled Ships West of the 108
Meridian.
3743 Railroad Equipment............... 1,000
3761 Guided Missiles and Space 1,000
Vehicles.
3764 Guided Missile and Space Vehicle 1,000
Propulsion Units and Propulsion Units
Parts.
3769 Guided Missile and Space Vehicle 1,000
Parts and Auxiliary Equipment, N.E.C.
3795 Tanks and Tank Components........ 1,000
3812 Search, Detection, Navigation, 750
Guidance, Aeronautical, and Nautical
Systems and Instruments.
3996 Linoleum, Asphalted-Felt-Base, 750
and other Hard Surface Floor
Coverings, N.E.C.
------------------------------------------------------------------------
DIVISION E--TRANSPORTATION, COMMUNICATIONS ELECTRIC, GAS, AND SANITARY
SERVICES
------------------------------------------------------------------------
MAJOR GROUP 40--RAILROAD TRANSPORTATION.... 1500
EXCEPT:
4013 Railroad Switching and Terminal 500
Establishments.
MAJOR GROUP 41--LOCAL AND SUBURBAN TRANSIT $5.0
AND INTERURBAN HIGHWAY AND PASSENGER
TRANSPORTATION.
MAJOR GROUP 42--MOTOR FREIGHT $18.5
TRANSPORTATION AND WAREHOUSING.
EXCEPT:
4212 (Part) Garbage and Refuse $6.0
Collection, Without Disposal.
4231 Terminal and Joint Terminal $5.0
Maintenance Facilities for Motor
Freight Transportation.
MAJOR GROUP 44--WATER TRANSPORTATION....... 500
EXCEPT:
4491 Marine Cargo Handling............ $18.5
4492 Towing and Tugboat Services...... $5.0
4493 Marinas.......................... $5.0
4499 Water Transportation Services, $5.0
N.E.C..
--Offshore Marine Water $20.5
Transportation Services.
[[Page 3292]]
MAJOR GROUP 45--TRANSPORTATION BY AIR...... 1500
EXCEPT:
4522 Air Transportation, Nonscheduled. 1500
--Offshore Marine Air $20.5
Transportation Services.
4581 Airports, Flying Fields, and $5.0
Airport Terminal Services.
MAJOR GROUP 46--PIPELINES, EXCEPT NATURAL 1500
GAS,.
EXCEPT:
4619 Pipelines, N.E.C................. $25.0
MAJOR GROUP 47--TRANSPORTATION SERVICES,... $5.0
EXCEPT:
4724 Travel Agencies.................. $1.0\6\
4731 Arrangement of Transportation of $18.5
Freight and Cargo.
4783 Packing and Crating.............. $18.5
MAJOR GROUP 48--COMMUNICATIONS.............
4812 Radiotelephone Communications.... 1,500
4813 Telephone Communications, Except 1,500
Radiotelephone.
4822 Telegraph and Other Message $5.0
Communications.
4832 Radio Broadcasting Stations...... $5.0
4833 Television Broadcasting Stations. $10.5
4841 Cable and Other Pay Television $11.0
Services.
4899 Communications Services, N.E.C... $11.0
MAJOR GROUP 49--ELECTRIC, GAS, AND SANITARY $5.0
SERVICES,.
EXCEPT:
4911 Electric Services................ 4 million megawatt hrs.
4924 Natural Gas Distribution......... 500
4953 Refuse Systems................... $6.0
4961 Steam and Air-Conditioning Supply $9.0
------------------------------------------------------------------------
DIVISION F--WHOLESALE TRADE................ 100
------------------------------------------------------------------------
(Not Applicable to Government
procurement of supplies. The
nonmanufacturer size standard of 500
employees shall be used for purposes
of Government procurement of
supplies.)
------------------------------------------------------------------------
DIVISION G--RETAIL TRADE................... $5.0
(Not Applicable to Government
procurement of supplies. The
nonmanufacturer size standard of 500
employees shall be used for purposes
of Government procurement of
supplies.)
------------------------------------------------------------------------
5271 Mobile Home Dealers.............. $9.5
5311 Department Stores................ $20.0
5331 Variety Stores................... $8.0
5411 Grocery Stores................... $20.0
5511 Motor Vehicle Dealers (New and $21.0
Used).
5521 Motor Vehicle Dealers (Used Only) $17.0
5541 Gasoline Service Stations........ $6.5
5599 Automobile Dealers, N.E.C........ $5.0
--Aircraft Dealers, Retail....... $7.5
5611 Men's and Boys' Clothing and $6.5
Accessory Stores.
5621 Women's Clothing Stores.......... $6.5
5651 Family Clothing Stores........... $6.5
5661 Shoe Stores...................... $6.5
5722 Household Appliance Stores....... $6.5
5731 Radio, Television, and Consumer $6.5
Electronics Stores.
5734 Computer and Computer Software $6.5
Stores.
5812 (Part) Food Service, $15.0
Institutional.
5961 Catalog and Mail-Order Houses.... $18.5
5983 Fuel Oil Dealers................. $9.0
------------------------------------------------------------------------
DIVISION H--FINANCE, INSURANCE, AND REAL $5.0
ESTATE.
------------------------------------------------------------------------
EXCEPT:
6021-6082 National and Commercial $100 Million in assets \7\
Banks, Savings, Institutions and
Credit Unions.
6331 Fire, Marine, and Casualty 1,500
Insurance.
6515 (Part) Leasing of Building Space $15.0 \8\
to Federal Government by Owners.
6531 Real Estate Agents and Managers.. $1.5 \6\
------------------------------------------------------------------------
DIVISION I--SERVICES....................... $5.0
------------------------------------------------------------------------
EXCEPT:
[[Page 3293]]
7211 Power Laundries, Family and $10.5
Commercial.
7213 Linen Supply..................... $10.5
7216 Drycleaning Plants, Except Rug $3.5
Cleaning.
7217 Carpet and Upholstery Cleaning... $3.5
7218 Industries Launderers............ $10.0
7311 Advertising Agencies............. $5.0 \6\
7312 Outdoor Advertising Services..... $5.0 \6\
7313 Radio, Television, and $5.0 \6\
Publishers' Advertising
Representatives.
7319 Advertising, N.E.C............... $5.0 \6\
7349 Building Cleaning and Maintenance $12.0
Services, N.E.C..
7371 Computer Programming Services.... $18.0
7372 Prepackaged Software............. $18.0
7373 Computer Integrated Systems $18.0
Design.
7374 Computer Processing and Data $18.0
Preparation and Processing Services.
7375 Information Retrieval Services... $18.0
7376 Computer Facilities Management $18.0
Services.
7377 Computer Rental and Leasing...... $18.0
7378 Computer Maintenance and Repair.. $18.0
7379 Computer Related Services, N.E.C. $18.0
7381 Detective, Guard, and Armord Car $9.0
Services.
7382 Security Systems Services........ $9.0
7389 Business Services, N.E.C......... $5.0
Map Drafting Services, Mapmaking $3.5
(Including Aerial) and
Photogrammetric Mapping Services.
7513 Truck Rental and Leasing Without $18.5
Drivers.
7514 Passenger Car Rental............. $18.5
7515 Passenger Car Leasing............ $18.5
7534 Tire Retreading and Repair Shops. $10.5
7699 Repair Shops and Related $5.0 \9\
Services, N.E.C.
7812 Motion Picture and Video Tape $21.5
Production.
7819 Services Allied to Motion Picture $21.5
Production.
7822 Motion Picture and Video Tape $21.5
Distribution.
8299 (Part) Flight Training Services.. $18.5
8711 Engineering Services............. $2.5
Military and Aerospace Equipment $20.0
and Military Weapons.
Contracts and Subcontracts for $20.0
Engineering Services Awarded Under
the National Energy Policy Act of
1992.
Marine Engineering and Naval $13.5
Architecture.
8712 Architectural Services (Other $2.5
Than Naval).
8713 Surveying Services............... $2.5
8721 Accounting, Auditing, and $6.0
Bookkeeping Services.
8731 Commercial Physical and 500 \10\
Biological Research.
Aircraft........................... 1,500
Aircraft Parts, and Auxiliary 1,000
Equipment, and Aircraft Engines
and Engine Parts.
Space Vehicles and Guided Missiles, 1,000
their Propulsion Units, their
Propulsion Units Parts, and their
Auxiliary Equipment and Parts.
8741 (Part) Conference Management $5.0 \6\
Services.
8744 Facilities Support Management $5.0 \11\
Services.
Base Maintenance................... $20.0 \12\
Environmental Remediation Services. 500 \13\
------------------------------------------------------------------------
Footnotes:
\1\ SIC code 1629--Dredging: To be considered small for purposes of
Government procurement, a firm must perform at least 40 percent of the
volume dredged with its own equipment or equipment owned by another
small dredging concern.
\2\ SIC Division D--Manufacturing: For rebuilding machinery or equipment
on a factory basis, or equivalent, use the SIC code for a newly
manufactured product. Concerns performing major rebuilding or overhaul
activities do not necessarily have to meet the criteria for being a
``manufacturer'' although the activities may be classified under a
manufacturing SIC code. Ordinary repair services or preservation are
not considered rebuilding.
\3\ SIC code 2033: For purposes of Government procurement for food
canning and preserving, the standard of 500 employees excludes
agricultural labor as defined in section 3306(k) of the Internal
Revenue Code, 26 U.S.C. 3306(k).
\4\ SIC code 2911: For purposes of Government procurement, the firm may
not have more than 1,500 employees nor more than 75,000 barrels per
day capacity of petroleum-based inputs, including crude oil or bona
fide feedstocks. Capacity includes owned or leased facilities as well
as facilities under a processing agreement or an arrangement such as
an exchange agreement or a throughput. The total product to be
delivered under the contract must be at least 90 percent refined by
the successful bidder from either crude oil or bona fide feedstocks.
\5\ SIC code 3011: For purposes of Government procurement, a firm is
small for bidding on a contract for pneumatic tires within Census
Classification codes 30111 and 30112, provided that:
(1) The value of tires within Census Classification codes 30111 and
30112 which it manufactured in the United States during the previous
calendar year is more than 50 percent of the value of its total
worldwide manufacture;
(2) The value of pneumatic tires within Census Classification codes
30111 and 30112 comprising its total worldwide manufacture during the
preceding calendar year was less than 5 percent of the value of all
such tires manufactured in the United States during that period; and
(3) the value of the principal product which it manufactured or
otherwise produced, or sold worldwide during the preceding calendar
year is less than 10 percent of the total value of such products
manufactured or otherwise produced or sold in the United States during
that period.
\6\ SIC codes 4724, 6531, 7311, 7312, 7313, 7319, and 8741 (part): As
measured by total revenues, but excluding funds received in trust for
an unaffiliated third party, such as bookings or sales subject to
commissions. The commissions received are included as revenue.
[[Page 3294]]
\7\ A financial institution's assets are determined by averaging the
assets reported on its four quarterly financial statements for the
preceding year. Assets for the purposes of this size standard means
the assets defined according to the Federal Financial Institutions
Examination Council 034 call report form.
\8\ SIC code 6515: Leasing of building space to the Federal Government
by Owners: For Government procurement, a size standard of $15.0
million in gross receipts applies to the owners of building space
leased to the Federal Government. The standard does not apply to an
agent.
\9\ SIC codes 7699 and 3728: Contracts for the rebuilding or overhaul of
aircraft ground support equipment on a contract basis are classified
under SIC code 3728.
\10\ SIC code 8731: For research and development contracts requiring the
delivery of a manufactured product, the appropriate size standard is
that of the manufacturing industry.
(1) Research and Development means laboratory or other physical research
and development. It does not include economic, educational,
engineering, operations, systems, or other nonphysical research; or
computer programming, data processing, commercial and/or medical
laboratory testing.
(2) For purposes of the Small Business Innovation Research (SBIR)
program only, a different definition has been established by law. See
Sec. 121.701.
(3) Research and development for guided missiles and space vehicles
includes evaluations and simulation, and other services requiring
thorough knowledge of complete missiles and spacecraft.
\11\ Facilities Management, a component of SIC code 8744, includes
establishments, not elsewhere classified, which provide overall
management and the personnel to perform a variety of related support
services in operating a complete facility in or around a specific
building, or within another business or Government establishment.
Facilities management means furnishing three or more personnel supply
services which may include, but are not limited to, secretarial
services, typists, telephone answering, reproduction or mimeograph
service, mailing service, financial or business management, public
relations, conference planning, travel arrangements, word processing,
maintaining files and/or libraries, switchboard operation, writers,
bookkeeping, minor office equipment maintenance and repair, or use of
information systems (not programming).
\12\ SIC code 8744:
(1) If one of the activities of base maintenance, as defined in
paragraph (2) of this footnote, can be identified with a separate
industry and that activity (or industry) accounts for 50 percent or
more of the value of an entire contract, then the proper size standard
is that of the particular industry, and not the base maintenance size
standard.
(2) ``Base Maintenance'' requires the performance of three or more
separate activities in the areas of service or special trade
construction industries. If services are performed, these activities
must each be in a separate SIC code including, but not limited to,
Janitorial and Custodial Service, Fire Prevention Service, Messenger
Service, Commissary Service, Protective Guard Service, and Grounds
Maintenance and Landscaping Service. If the contract requires the use
of special trade contractors (plumbing, painting, plastering,
carpentry, etc.), all such special trade construction activities are
considered a single activity and classified as Base Housing
Maintenance. Since Base Housing Maintenance is only one activity, two
additional activities are required for a contract to be classified as
``Base Maintenance.''
\13\ SIC codre 8744: (1) For SBA assistance as a small business concern
in the industry of Environmental Remediation Services, other than for
Government procurement, a concern must be engaged primarily in
furnishing a range of services for the remediation of a contaminated
environment to an acceptable condition including, but not limited to,
preliminary assessment, site inspection, testing, remedial
investigation, feasibility studies, remedial design, containment,
remedial action, removal of contaminated materials, storage of
contaminated materials and security and site closeouts. If one of such
activities accounts for 50 percent or more of a concern's total
revenues, employees, or other related factors, the concern's primary
industry is that of the particular industry and not the Environmental
Remediation Services Industry.
(2) For purposes of classifying a Government procurement as
Environmental Remediation Services, the general purpose of the
procurement must be to restore a contaminated environment and also the
procurement must be composed of activities in three or more separate
industries with separate SIC codes or, in some instances (e.g.,
engineering), smaller sub-components of SIC codes with separate,
distinct size standards. These activities may include, but are not
limited to, separate activities in industries such as: Heavy
Construction; Special Trade Construction; Engineering Services;
Architectural Services; Management Services; Refuse Systems; Sanitary
Services, Not Elsewhere Classified; Local Trucking Without Storage;
Testing Laboratories; and Commercial, Physical and Biological
Research. If any activity in the procurement can be identified with a
separate SIC code, or component of a code with a separate distinct
size standard, and that industry accounts for 50 percent or more of
the value of the entire procurement, then the proper size standard is
the one for that particular industry, and not the Environmental
Remediation Service size standard.
Size Eligibility Requirements For SBA Financial Assistance
Sec. 121.301 What size standards are applicable to financial
assistance programs?
(a) For Business Loans and Disaster Loans (other than physical
disaster loans), an applicant must not exceed the size standard for the
industry in which:
(1) The applicant combined with its affiliates is primarily
engaged; and
(2) The applicant alone is primarily engaged.
(b) For Development Company programs, an applicant must meet one of
the following standards:
(1) Including its affiliates, tangible net worth not in excess of
$6 million, and average net income after Federal income taxes
(excluding any carry-over losses) for the preceding two completed
fiscal years not in excess of $2 million; or
(2) The same standards applicable under paragraph (a) of this
section.
(c) For the Small Business Investment Company (SBIC) program, an
applicant must meet one of the following standards:
(1) Including its affiliates, tangible net worth not in excess of
$18 million, and average net income after Federal income taxes
(excluding any carry-over losses) for the preceding 2 completed fiscal
years not in excess of $6 million; or
(2) The same standards applicable under paragraph (a) of this
section.
(d) For Surety Bond Guarantee assistance--
(1) Any construction (general or special trade) concern or concern
performing a contract for services is small if its average annual
receipts do not exceed $5.0 million.
(2) Any concern not specified in paragraph (d)(1) of this section
must meet the size standard for the primary industry in which it,
combined with its affiliates, is engaged.
(e) The applicable size standards for the purpose of all SBA
financial assistance programs, excluding the Surety Bond Guarantee
assistance program, are increased by 25 percent whenever the applicant
agrees to use the assistance within a labor surplus area. Labor surplus
areas are listed monthly in the Department of Labor publication called
``Area Trends.''
Sec. 121.302 When does SBA determine the size status of an applicant?
(a) The size of an applicant for SBA financial assistance is
determined as of the date the application for such financial assistance
is accepted for processing by SBA, except for the Disaster Loan and
Preferred Lenders programs.
(b) For the Preferred Lenders program, size is determined as of the
date of approval of the loan by the Preferred Lender.
(c) For disaster loan assistance (other than physical disaster
loans), size status is determined as of the date the disaster
commenced, as set forth in the Disaster Declaration.
(d) Changes in size subsequent to the applicable date when size is
determined will not disqualify an applicant for assistance.
[[Page 3295]]
Sec. 121.303 What size procedures are used by SBA before it makes a
formal size determination?
(a) A concern that submits an application for financial assistance
is deemed to have certified that it is small under the applicable size
standard. SBA may question the concern's status based on information
supplied in the application or from any other source.
(b) A small business investment company, a development company, a
surety bond company, or a preferred lender may accept as true the size
information provided by an applicant, unless credible evidence to the
contrary is apparent.
(c) Size is initially considered by the individual with final
financial assistance authority. This is not a formal size
determination. A formal determination may be requested prior to a
denial of eligibility based on size.
(d) An applicant may request a formal size determination when
assistance has been denied for size ineligibility. Except for disaster
loan eligibility, a request for a formal size determination must be
made to the Government Contracting Area Director serving the area in
which the headquarters of the applicant is located, regardless of the
location of the parent company or affiliates. For disaster loan
assistance, the request for a size determination must be made to the
Area Director for the Disaster Area Office which denied the assistance.
(e) There are no time limitations for making a formal size
determination for purposes of financial assistance. The official making
the formal size determination must provide a copy of the determination
to the applicant, to the requesting SBA official, and to other
interested SBA program officials.
Sec. 121.304 What are the size requirements for refinancing an
existing SBA loan?
(a) A concern that applies to refinance an existing SBA loan or
guarantee will be considered small for the refinancing even though its
size has increased since the date of the original financing to exceed
its applicable size standard, provided that:
(1) The increase in size is due to natural growth (as distinguished
from merger, acquisition or similar management action); and
(2) SBA determines that refinancing is necessary to protect the
Government's financial interest.
(b) If a concern's size has increased other than by natural growth,
the concern and its affiliates must be small at the time the
application for refinancing is accepted for processing by SBA.
Sec. 121.305 What size eligibility requirements exist for obtaining
business loans relating to particular procurements?
A concern qualified as small for a particular procurement,
including an 8(a) subcontract, is small for financial assistance
directly and primarily relating to the performance of the particular
procurement.
Size Eligibility Requirements for Government Procurement
Sec. 121.401 What procurement programs are subject to size
determinations?
The requirements set forth in Secs. 121.401 through 121.412 cover
all procurement programs for which status as a small business is
required, including the small business set-aside program, SBA's
Certificate of Competency Program, SBA's Minority Enterprise
Development program, the Small Business Subcontracting program
authorized under section 8(d) of the Small Business Act, and Federal
Small Disadvantaged Business programs.
Sec. 121.402 What size standards are applicable to procurement
assistance programs?
(a) A concern must meet the size standard for the SIC code
specified in the solicitation.
(b) The procuring agency contracting officer, or authorized
representative, designates the proper SIC code and size standard in a
solicitation, selecting the SIC code which best describes the principal
purpose of the product or service being acquired. Primary consideration
is given to the industry descriptions in the SIC Manual, the product or
service description in the solicitation and any attachments to it, the
relative value and importance of the components of the procurement
making up the end item being procured, and the function of the goods or
services being purchased. Other factors considered include previous
Government procurement classifications of the same or similar products
or services, and the classification which would best serve the purposes
of the Small Business Act. A procurement is usually classified
according to the component which accounts for the greatest percentage
of contract value.
(c) The SIC code assigned to a procurement and its corresponding
size standard is final unless timely appealed to SBA's Office of
Hearings and Appeals (OHA), or unless SBA assigns a SIC code or size
standard as provided in paragraph (d) of this section.
(d) An unclear, incomplete or missing SIC code designation or size
standard in the solicitation may be clarified, completed or supplied by
SBA in connection with a formal size determination or size appeal.
(e) Any offeror or other interested party adversely affected by a
SIC code designation or size standard designation may appeal the
designations to OHA under Part 134 of this chapter.
Sec. 121.403 Are SBA size determinations and SIC code designations
binding on parties?
Formal size determinations and SIC code designations made by
authorized SBA officials are binding upon the parties. Opinions
otherwise provided by SBA officials to contracting officers or others
are advisory in nature, and are not binding or appealable.
Sec. 121.404 When does SBA determine the size status of a business
concern?
Generally, SBA determines the size status of a concern (including
its affiliates) as of the date the concern submits a written self-
certification that it is small to the procuring agency as part of its
initial offer including price. The following are two exceptions to this
rule:
(a) The size status of an applicant for a Certificate of Competency
(COC) relating to an unrestricted procurement is determined as of the
date of the concern's application for the COC.
(b) Size status for purposes of compliance with the nonmanufacturer
rule set forth in Sec. 121.406(b)(1) and the ostensible subcontractor
rule set forth in Sec. 121.103(f)(3) is determined as of the date of
the best and final offer.
Sec. 121.405 May a business concern self-certify its small business
size status?
(a) A concern must self-certify it is small under the size standard
specified in the solicitation, or as clarified, completed or supplied
by SBA pursuant to Sec. 121.402(d).
(b) A contracting officer may accept a concern's self-certification
as true for the particular procurement involved in the absence of a
written protest by other offerors or other credible information which
causes the contracting officer or SBA to question the size of the
concern.
(c) Procedures for protesting the self-certification of an offeror
are set forth in Secs. 121.1001 through 121.1009.
Sec. 121.406 How does a small business concern qualify to provide
manufactured products under small business set-aside or MED
procurements?
(a) General. In order to qualify as a small business concern for a
small business set-aside or 8(a) contract to provide manufactured
products, an offeror must either:
(1) Be the manufacturer of the end item being procured (and the end
item
[[Page 3296]]
must be manufactured or produced in the United States); or
(2) Comply with the requirements of paragraph (b), (c) or (d) of
this section as a nonmanufacturer, a kit assembler or a supplier under
Simplified Acquisition Procedures.
(b) Nonmanufacturers. (1) A concern may qualify for a requirement
to provide manufactured products as a nonmanufacturer if it:
(i) Does not exceed 500 employees;
(ii) Is primarily engaged in the wholesale or retail trade and
normally sells the items being supplied to the general public; and
(iii) Will supply the end item of a small business manufacturer or
processor made in the United States, or obtains a waiver of such
requirement pursuant to paragraph (b)(3) of this section.
(2) For size purposes, there can be only one manufacturer of the
end item being acquired. The manufacturer is the concern which, with
its own facilities, performs the primary activities in transforming
inorganic or organic substances, including the assembly of parts and
components, into the end item being acquired. The end item must possess
characteristics which, as a result of mechanical, chemical or human
action, it did not possess before the original substances, parts or
components were assembled or transformed. The end item may be finished
and ready for utilization or consumption, or it may be semifinished as
a raw material to be used in further manufacturing. Firms which perform
only minimal operations upon the item being procured do not qualify as
manufacturers of the end item. SBA will evaluate the following factors
in determining whether a concern is the manufacturer of the end item:
(i) The proportion of total value in the end item added by the
efforts of the concern, excluding costs of overhead, testing, quality
control, and profit; and
(ii) The importance of the elements added by the concern to the
function of the end item, regardless of their relative value.
(3) The Administrator or designee may waive the requirement set
forth in paragraph (b)(1)(iii) of this section under the following two
circumstances:
(i) The contracting officer has determined that no small business
manufacturer or processor reasonably can be expected to offer a product
meeting the specifications (including period for performance) required
by a particular solicitation and SBA reviews and accepts that
determination; or
(ii) SBA determines that no small business manufacturer or
processor of the product or class of products is available to
participate in the Federal procurement market.
(4) The two waiver possibilities identified in paragraph (b)(3) of
this section are called ``class'' waivers and ``individual'' waivers
respectively, and the procedures for them are contained in
Sec. 121.1204 .
(5) Any SBA waiver of the nonmanufacturer rule has no effect on
requirements external to the Small Business Act which involve domestic
sources of supply, such as the Buy American Act.
(c) Kit assemblers. (1) Where the manufactured item being acquired
is a kit of supplies or other goods provided by an offeror for a
special purpose, the offeror cannot exceed 500 employees, and 50
percent of the total value of the components of the kit must be
manufactured by business concerns in the United States which are small
under the size standards for the SIC codes of the components being
assembled. The offeror need not itself be the manufacturer of any of
the items assembled.
(2) Where the Government has specified an item for the kit which is
not produced by U.S. small business concerns, such item shall be
excluded from the calculation of total value in paragraph (c)(1) of
this section.
(d) Simplified Acquisition Procedures. Where the procurement of a
manufactured item is processed under Simplified Acquisition Procedures,
as defined in Sec. 13.101 of the Federal Acquisition Regulation (FAR)
(48 CFR 13.101), and where the anticipated cost of the procurement will
not exceed $25,000, the offeror need not supply the end product of a
small business concern as long as the product acquired is manufactured
or produced in the United States, and the offeror does not exceed 500
employees. The offeror need not itself be the manufacturer of any of
the items acquired.
Sec. 121.407 What are the size procedures for multiple item
procurements?
If a procurement calls for two or more specific end items or types
of services with different size standards and the offeror may submit an
offer on any or all end items or types of services, the offeror must
meet the size standard for each end item or service item for which it
submits an offer. If the procurement calls for more than one specific
end item or type of service and an offeror is required to submit an
offer on all items, the offeror may qualify as a small business for the
procurement if it meets the size standard of the item which accounts
for the greatest percentage of the total contract value.
Sec. 121.408 What are the size procedures for SBA's Certificate of
Competency Program?
(a) A firm which applies for a COC must file an ``Application for
Small Business Size Determination'' (SBA Form 355). If the initial
review of SBA Form 355 indicates the applicant, including its
affiliates, is small for purposes of the COC program, SBA will process
the application for COC. If the review indicates the applicant,
including its affiliates, is other than small, SBA will initiate a
formal size determination as set forth in Sec. 121.1009. In such a
case, SBA will not further process the COC application until a formal
size determination is made.
(b) A concern is ineligible for a COC if a formal SBA size
determination finds the concern other than small.
Sec. 121.409 What size standard applies in an unrestricted procurement
for Certificate of Competency purposes?
For the purpose of receiving a Certificate of Competency in an
unrestricted procurement, the applicable size standard is that
corresponding to the SIC code set forth in the solicitation. For a
manufactured product, a concern must also furnish a domestically
produced or manufactured product, regardless of the size status of the
product manufacturer. The offeror need not be the manufacturer of any
of the items acquired.
Sec. 121.410 What are the size standards for SBA's Section 8(d)
Subcontracting Program?
For subcontracting purposes pursuant to section 8(d) of the Small
Business Act, a concern is small:
(a) For subcontracts of $10,000 or less which relate to Government
procurements, if its number of employees (including its affiliates)
does not exceed 500 employees. However, subcontracts for engineering
services awarded under the National Energy Policy Act of 1992 have the
same size standard as Military and Aerospace Equipment and Military
Weapons under SIC code 8711;
(b) For subcontracts exceeding $10,000 which relate to Government
procurements, if its number of employees or average annual receipts
(including its affiliates) does not exceed the size standard for the
product or service it is providing on the subcontract; and
(c) For subcontracts for financial services, if the concern
(including its affiliates) is a commercial bank or savings and loan
association whose assets do not exceed $100 million.
[[Page 3297]]
Sec. 121.411 What are the size procedures for SBA's Section 8(d)
Subcontracting Program?
(a) Prime contractors may rely on the information contained in
SBA's Procurement Automated Source System (PASS), or equivalent data
base maintained or sanctioned by SBA, as an accurate representation of
a concern's size and ownership characteristics for purposes of
maintaining a small business source list. Even though a concern is on a
small business source list, it must still qualify and self-certify as a
small business at the time it submits its offer as a section 8(d)
subcontractor.
(b) Upon determination of the successful subcontract offeror for a
competitive subcontract, but prior to award, the prime contractor must
inform each unsuccessful subcontract offeror in writing of the name and
location of the apparent successful offeror.
(c) The self-certification of a concern subcontracting or proposing
to subcontract under section 8(d) of the Small Business Act may be
protested by the contracting officer, the prime contractor, the
appropriate SBA official or any other interested party.
Sec. 121.412 What are the size procedures for partial small business
set-asides?
A firm is required to meet size standard requirements only for the
small business set-aside portion of a procurement, and is not required
to qualify as a small business for the unrestricted portion.
Size Eligibility Requirements For Sales Or Lease Of Government Property
Sec. 121.501 What programs for sales or leases of Government property
are subject to size determinations?
Sections 121.501 through 121.512 apply to small business size
determinations for the purpose of the sale or lease of Government
property, including the Timber Sales Program, the Special Salvage
Timber Sales Program, and the sale of Government petroleum, coal and
uranium.
Sec. 121.502 What size standards are applicable to programs for sales
or leases of Government property?
(a) Unless otherwise specified in this part--
(1) A concern primarily engaged in manufacturing is small for sales
or leases of Government property if it does not exceed 500 employees;
(2) A concern not primarily engaged in manufacturing is small for
sales or leases of Government property if it has annual receipts not
exceeding $2 million.
(b) Size status for such sales and leases is determined by the
primary industry of the applicant business concern.
Sec. 121.503 Are SBA size determinations binding on parties?
Formal size determinations based upon a specific Government sale or
lease, or made in response to a request from another Government agency
under Sec. 121.901, are binding upon the parties. Other SBA opinions
provided to contracting officers or others are only advisory, and are
not binding or appealable.
Sec. 121.504 When does SBA determine the size status of a business
concern?
SBA determines the size status of a concern (including its
affiliates) as of the date the concern submits a written self-
certification that it is small to the Government as part of its initial
offer including price where there is a specific sale or lease at issue,
or as set forth in Sec. 121.903 if made in response to a request of
another Government agency.
Sec. 121.505 What is the effect of a self-certification?
(a) A contracting officer may accept a concern's self-certification
as true for the particular sale or lease involved, in the absence of a
written protest by other offerors or other credible information which
would cause the contracting officer or SBA to question the size of the
concern.
(b) Procedures for protesting the self-certification of an offeror
are set forth in Secs. 121.1001 through 121.1009.
Sec. 121.506 What definitions are important for sales or leases of
Government-owned timber?
(a) Forest product industry means logging, wood preserving, and the
manufacture of lumber and wood related products such as veneer,
plywood, hardboard, particle board, or wood pulp, and of products of
which lumber or wood related products are the principal raw materials.
(b) Logging of timber means felling and bucking, yarding, and/or
loading. It does not mean hauling.
(c) Manufacture of logs means, at a minimum, breaking down logs
into rough cuts of the finished product.
(d) Sell means, in addition to its usual and customary meaning, the
exchange of sawlogs for sawlogs on a product-for-product basis with or
without monetary adjustment, and an indirect transfer, such as the sale
of the assets of a concern after it has been awarded one or more set-
aside sales of timber.
(e) Significant logging of timber means that a concern uses its own
employees to perform at least two of the following: felling and
bucking, yarding, and loading.
Sec. 121.507 What are the size standard and other requirements for the
purchase of Government-owned timber (other than Special Salvage
Timber)?
(a) To be small for purposes of the sale of Government-owned timber
(other than Special Salvage Timber) a concern must:
(1) Be primarily engaged in the logging or forest products
industry;
(2) Not exceed 500 employees, taking into account its affiliates;
and
(3) If it does not intend at the time of the offer to resell the
timber--
(i) Agree that it will manufacture the logs with its own facilities
or those of another business which meets the requirements of paragraphs
(a)(1) and (a)(2) of this section;
(ii) Agree that if it eventually resells the timber, it will resell
no more than 30% of the sawtimber volume to other businesses which do
not meet the requirements of paragraphs (a)(1) and (a)(2) of this
section; and
(iii) Agree that if it becomes acquired or controlled by a business
which does not meet the requirements of paragraphs (a)(1) and (a)(2) of
this section, it will require as a condition of the acquisition or
change of control that the acquiring or controlling business resell at
least 70% of the sawtimber volume to businesses which do meet the
requirements of paragraphs
(a)(1) and (a)(2) of this section; or
(4) If it intends at the time of offer to resell the timber--
(i) Agree that it will not sell more than 30% of such timber (50%
of such timber if the concern is an Alaskan business) to a business
which does not meet the requirements of paragraphs (a)(1) and (a)(2) of
this section; and
(ii) Agree that if it becomes acquired or controlled by a business
which does not meet the requirements of paragraphs (a)(1) and (a)(2) of
this section, it will require as a condition of the acquisition or
change of control that the acquiring or controlling business resell at
least 70% of the sawtimber volume (or at least 50% of the sawtimber
volume, if it is an Alaskan business) to businesses which meet the
requirements of paragraphs (a)(1) and (a)(2) of this section.
(b) For a period of three years following the date upon which a
concern purchases timber under a small business set-aside (other than
through the Special Salvage Timber Sale program), it must maintain a
record of:
(1) The name, address and size status of every concern to which it
sells the timber or sawlogs; and
[[Page 3298]]
(2) The species, grades and volumes of sawlogs sold.
(c) For a period of three years following the date upon which a
concern purchases timber, it must by contract require all small
business repurchasers of the sawlogs or timber it purchased under the
small business set-aside to maintain the records described in paragraph
(b) of this section.
Sec. 121.508 What are the size standard and other requirements for the
purchase of Government-owned Special Salvage Timber?
(a) In order to purchase Government-owned Special Salvage Timber
from the United States Forest Service or the Bureau of Land Management
as a small business, a concern must:
(1) Be primarily engaged in the logging or forest product industry;
(2) Have, together with its affiliates, no more than twenty-five
employees during any pay period for the last twelve months; and
(3) If it does not intend at the time of offer to resell the
timber--
(i) Agree that it will manufacture a significant portion of the
logs with its own employees; and
(ii) Agree that it will log the timber only with its own employees
or with employees of another business which is eligible for award of a
Special Salvage Timber sales contract; or
(4) If it intends at the time of offer to resell the timber, agree
that it will perform a significant portion of timber logging with its
own employees and that it will subcontract the remainder of the timber
logging to a concern which is eligible for award of a Special Salvage
Timber sales contract.
Sec. 121.509 What is the size standard for leasing of Government land
for coal mining?
A concern is small for this purpose if it:
(a) Together with its affiliates, does not have more than 250
employees;
(b) Maintains management and control of the actual mining
operations of the tract; and
(c) Agrees that if it subleases the Government land, it will be to
another small business, and that it will require its sublessors to
agree to the same.
Sec. 121.510 What is the size standard for leasing of Government land
for uranium mining?
A concern is small for this purpose if it, together with its
affiliates, does not have more than 100 employees.
Sec. 121.511 What is the size standard for buying Government-owned
petroleum?
A concern is small for this purpose if it is primarily engaged in
petroleum refining and meets the size standard for a petroleum refining
business.
Sec. 121.512 What is the size standard for stockpile purchases?
A concern is small for this purpose if:
(a) It is primarily engaged in the purchase of materials which are
not domestic products; and
(b) Its annual receipts, together with its affiliates, do not
exceed $42 million.
Size Eligibility Requirements for the Minority Enterprise Development
(MED) Program
Sec. 121.601 What is a small business for purposes of admission to
SBA's Minority Enterprise Development (MED) program?
An applicant must be small under the size standard corresponding to
its primary industry classification in order to be admitted to SBA's
Minority Enterprise Development (MED) program.
Sec. 121.602 At what point in time must a MED applicant be small?
A MED applicant must be small for its primary industry at the time
SBA certifies it for admission into the program.
Sec. 121.603 How does SBA determine whether a Participant is small for
a particular MED subcontract?
(a) Self certification by Participant. A MED Participant must
certify that it qualifies as a small business under the SIC code
assigned to a particular MED subcontract as part of its initial offer
including price to the procuring agency. The Participant also must
submit a copy of its offer, including its self-certification as to
size, to the appropriate SBA district office at the same time it
submits the offer to the procuring agency. See Sec. 121.404 for the
time at which size is determined for, and Sec. 121.406 for the
applicability of the nonmanufacturer rule to, MED procurements.
(b) Verification of size by SBA. Within 30 days of its receipt of a
Participant's size self-certification for a particular MED subcontract,
the SBA district office serving the geographic area in which the
Participant's principal office is located will review the Participant's
self-certification and determine if it is small for purposes of that
subcontract. The SBA district office will review the Participant's most
recent financial statements and other relevant data and then notify the
Participant of its decision.
(c) Changes in size between date of self-certification and date of
award. (1) Where SBA verifies that the selected Participant is small
for a particular procurement, subsequent changes in size up to the date
of award, except those due to merger with or acquisition by another
business concern, will not affect the firm's size status for that
procurement.
(2) Where a Participant has merged with or been acquired by another
business concern between the date of its self-certification and the
date of award, the concern must recertify its size status, and SBA must
verify the new certification before award can occur.
(d) Finding Participant to be other than small. (1) A Participant
may request a formal size determination (pursuant to Secs. 121.1001
through 121.1009) with the SBA Government Contracting Area Office
serving the geographic area in which the principal office of the
Participant is located within 5 working days of its receipt of notice
from the SBA district office that it is not small for a particular MED
subcontract.
(2) Where the Participant does not timely request a formal size
determination, SBA may accept the procurement in support of another
Participant, or may rescind its acceptance of the offer for the MED
program, as appropriate.
Sec. 121.604 Are MED Participants considered small for purposes of
other SBA assistance?
A concern which SBA determines to be a small business for the award
of a MED subcontract will be considered to have met applicable size
eligibility requirements of other SBA programs where that assistance
directly and primarily relates to the performance of the MED
subcontract in question.
Size Eligibility Requirements for the Small Business Innovation
Research (SBIR) Program
Sec. 121.701 What SBIR programs are subject to size determinations?
(a) These sections apply to size status for award of a funding
agreement pursuant to the Small Business Innovation Development Act of
1982 (Pub. L. 97-219, 15 U.S.C. 638(e) through (k)).
(b) Funding agreement officer means a contracting officer, a grants
officer, or a cooperative agreement officer.
(c) Funding agreement means any contract, grant or cooperative
agreement entered into between any Federal agency and any small
business for the performance of experimental, developmental, or
research work funded in whole or in part by the Federal Government.
Such work includes:
(1) A systematic, intensive study directed toward greater knowledge
or understanding of the subject studied;
[[Page 3299]]
(2) A systematic study directed specifically toward applying new
knowledge to meet a recognized need; or
(3) A systematic application of knowledge toward the production of
useful materials, devices, and systems or methods, including design,
development, and improvement of prototypes and new processes to meet
specific requirements.
Sec. 121.702 What size standards are applicable to the SBIR program?
To be eligible to compete for award of funding agreements in SBA's
Small Business Innovation Research (SBIR) program, a business concern
must:
(a) Be at least 51 percent owned and controlled by one or more
individuals who are citizens of, or permanent resident aliens in, the
United States; and
(b) Not have more than 500 employees, including its affiliates.
Sec. 121.703 Are formal size determinations binding on parties?
Size determinations by authorized SBA officials are formal actions
based upon a specific funding agreement, and are binding upon the
parties. Other SBA opinions provided to funding agreement officers or
others, are only advisory, and are not binding or appealable.
Sec. 121.704 When does SBA determine the size status of a business
concern?
The size status of a concern for the purpose of a funding agreement
under the SBIR program is determined as of the date of the award for
both Phase I and Phase II SBIR awards.
Sec. 121.705 Must a business concern self-certify its size status?
(a) A firm must self-certify it is small in its SBIR funding
proposal.
(b) A funding agreement officer may accept a concern's self-
certification as true for the particular funding agreement involved in
the absence of a written protest by other offerors or other credible
information which would cause the funding agreement officer or SBA to
question the size of the concern.
(c) Procedures for protesting an offeror's self-certification are
set forth in Secs. 121.1001 through 121.1009.
Size Eligibility Requirements For Paying Reduced Patent Fees
Sec. 121.801 May patent fees be reduced if a concern is small?
These sections apply to size status for the purpose of paying
reduced patent fees authorized by Pub. L. 97-247, 96 Stat. 317. The
eligibility requirements for independent inventors and nonprofit
organizations for the purpose of paying reduced patent fees are set
forth in regulations of the Patent and Trademark Office of the
Department of Commerce, 37 CFR 1.9, 1.27, 1.28.
Sec. 121.802 What size standards are applicable to reduced patent fees
programs?
A concern eligible for reduced patent fees is one:
(a) Whose number of employees, including affiliates, does not
exceed 500 persons; and
(b) Which has not assigned, granted, conveyed, or licensed (and is
under no obligation to do so) any rights in the invention to any person
who made it and could not be classified as an independent inventor, or
to any concern which would not qualify as a non-profit organization or
a small business concern under this section.
Sec. 121.803 Are formal size determinations binding on parties?
Size determinations by authorized SBA officials are formal actions,
based upon a specific patent application pursuant to the rules of the
Patent and Trademark Office, Department of Commerce, and are binding
upon the parties. Other SBA opinions provided to patent applicants or
others are only advisory, and are not binding or appealable.
Sec. 121.804 When does SBA determine the size status of a business
concern?
Size status is determined as of the date of the patent applicant's
written verification of size.
Sec. 121.805 May a business concern self-certify its size status?
(a) A concern verifies its size status with its submission of its
patent application.
(b) Any attempt to establish small size status improperly
(fraudulently, through gross negligence, or otherwise) may result in
remedial action by the Patent and Trademark Office.
(c) In the absence of credible information indicating otherwise,
the Patent and Trademark Office may accept the verification by the
concern as a small business as true.
(d) Questions concerning the size verification are resolved
initially by the Patent and Trademark Office. If not verified as small,
the applicant may request a formal SBA size determination.
Size Eligibility Requirements for Compliance With Programs of Other
Agencies
Sec. 121.901 Can other Government agencies obtain SBA size
determinations?
Upon request by another Government agency, SBA will provide a size
determination, under SBA rules, standards and procedures, for its use
in determining compliance with small business requirements of its
statutes, regulations or programs.
Sec. 121.902 What size standards are applicable to programs of other
agencies?
(a) SBA size standards. The size standards for compliance with
programs of other agencies are those for SBA programs which are most
comparable to the programs of such other agencies, unless otherwise
agreed by the agency and SBA.
(b) Special size standards. (1) Federal agencies or departments
promulgating regulations relating to small businesses usually use SBA
size criteria. In limited circumstances, if they decide the SBA size
standard is not appropriate, then agency heads may establish a small
business definition for the exclusive use of such program which is more
appropriate, but only when:
(i) The size standard is first proposed for public comment pursuant
to the Administrative Procedure Act, 4 U.S.C. 553;
(ii) The proposed size standard provides for determining size
measured by average number of employees over 12 months for
manufacturing concerns, average annual revenues over three years for
concerns providing services, and data over a period of not less than
three years for all other concerns (unless approved by SBA, ``annual
receipts'' and ``number of employees'' must be determined in accordance
with Secs. 121.104 and 121.106, respectively); and
(iii) The proposed size standard is approved by SBA's
Administrator.
(2) In order to receive the approval of SBA's Administrator, the
agency head must:
(i) Request approval prior to publishing the proposed rule
containing the size standard. The request must include: an explanation
of the contemplated industry size standard, the reasons the SBA size
standard is not appropriate, and the reasons the proposed size standard
would be appropriate; and a certification that there will be compliance
with the criteria set forth in paragraphs (b)(1)(i) and (b)(1)(ii) of
this section; and
(ii) Agree to provide written notice to SBA's Administrator prior
to publishing the contemplated size standard as a final rule. The
notice must include: a copy of the intended final rule, including the
preamble, or a separate written justification for the inte
FR Doc. 96-1348 Small Business Size Standards
nded size
standard followed by a copy of the intended final rule and preamble
prior to its publication; copies of all public
[[Page 3300]]
comments relating to the size standard received in response to the
proposed rule; and any other supporting documentation relevant to the
size standard and requested by SBA's Administrator.
(3) When approving any size standard established pursuant to
subsection (b) of this section, SBA's Administrator will ensure that
the size standard varies from industry to industry to the extent
necessary to reflect the differing characteristics of the various
industries, and consider other relevant factors.
(4) Where the agency head is developing a size standard for the
sole purpose of performing a Regulatory Flexibility Analysis pursuant
to the Regulatory Flexibility Act, the department or agency may, after
consultation with the SBA Office of Advocacy, establish a size standard
different from SBA's which is more appropriate for such analysis.
Sec. 121.903 When does SBA determine the size status of a business
concern?
For the purpose of compliance with programs of other agencies, SBA
will base its size determination on the size of the concern as of the
date set forth in the request of the other agency.
Procedures for Size Protests and Requests for Formal Size
Determinations
Sec. 121.1001 Who may initiate a size protest or a request for formal
size determination?
(a) Size Status Protests. (1) For SBA's Small Business Set-Aside
Program, including the Property Sales Program, the following entities
may file a size protest in connection with a particular procurement or
sale:
(i) Any offeror;
(ii) The contracting officer;
(iii) The SBA Government Contracting Area Director having
responsibility for the area in which the headquarters of the protested
offeror is located, regardless of the location of a parent company or
affiliates, or the Associate Administrator for Government Contracting;
and
(iv) Other interested parties. Other interested parties include
large businesses where only one concern submitted an offer for the
specific procurement in question. A concern found to be other than
small in connection with the procurement is not an interested party
unless there is only one remaining offeror after the concern is found
to be other than small.
(2) For SBA's Subcontracting Program, the following entities may
protest:
(i) The prime contractor;
(ii) The contracting officer;
(iii) Other potential subcontractors;
(iv) The responsible SBA Government Contracting Area Director or
the Associate Administrator for Government Contracting; and
(v) Other interested parties.
(3) For SBA's Small Business Innovation Research (SBIR) Program,
the following entities may protest:
(i) A prospective offeror;
(ii) The funding agreement officer;
(iii) The responsible SBA Government Contracting Area Director or
the Assistant Administrator for Technology; and
(iv) Other interested parties.
(4) For the Department of Defense's Small Disadvantaged Business
(SDB) Program, and any other similar program of another Federal agency,
the following entities may file a protest in connection with a
particular SDB procurement:
(i) Any offeror for the specific SDB requirement;
(ii) The contracting officer; and
(iii) The responsible SBA Government Contracting Area Director, the
Associate Administrator for Government Contracting, or the Associate
Administrator for MED.
(5) For any unrestricted Government procurement in which status as
a small business may be beneficial, including, but not limited to, the
award of a contract to a small business where there are tie bids, the
opportunity to seek a Certificate of Competency by a small business,
and SDB price evaluation preferences, the following entities may
protest in connection with a particular procurement:
(i) Any offeror;
(ii) The contracting officer; and
(iii) The responsible SBA Government Contracting Area Director, the
Associate Administrator for Government Contracting, or the Associate
Administrator for MED.
(b) Request for Size Determinations. (1) For SBA's Financial
Assistance Programs, the following entities may request a formal size
determination:
(i) The applicant for assistance; and
(ii) The SBA official with authority to take final action on the
assistance requested. That official may also request the appropriate
Government Contracting Area Office to determine whether affiliation
exists between an applicant for financial assistance and one or more
other entities for purposes of determining whether the applicant would
exceed the loan limit amount imposed by Sec. 120.151 of this chapter.
(2) For SBA's MED program--
(i) Concerning initial MED eligibility, the following entities may
request a formal size determination:
(A) The MED applicant concern; and
(B) The Director of the Division of Program Certification and
Eligibility or the Associate Administrator for MED.
(ii) Concerning individual 8(a) subcontract awards, whether sole
source or competitive, the following entities may request a formal size
determination:
(A) The MED concern nominated by SBA for the particular sole source
8(a) award or the apparent successful offeror for the particular
competitive 8(a) award;
(B) The SBA program official with authority to execute the 8(a)
subcontract; and
(C) The SBA District Director in the district serving the area in
which the headquarters of the MED concern is located, regardless of the
location of a parent company and affiliates, or the Associate
Administrator for MED.
(3) For SBA's Certificate of Competency Program, the following
entities may request a formal size determination:
(i) The offeror who has applied for a COC; and
(ii) The responsible SBA Government Contracting Area Director or
the Associate Administrator for Government Contracting.
(4) For SBA's sale or lease of government property, the following
entities may request a formal size determination:
(i) The responsible SBA Government Contracting Area Director or the
Associate Administrator for Government Contracting; and
(ii) Authorized officials of other Federal agencies administering a
property sales program.
(5) For eligibility to pay reduced patent fees, the following
entities may request a formal size determination:
(i) The applicant for the reduced patent fees; and
(ii) The Patent and Trademark Office.
(6) For purposes of determining compliance with small business
requirements of another Government agency program not otherwise
specified in this section, an official with authority to administer the
program involved may request a formal size determination.
Sec. 121.1002 Who makes a formal size determination?
The responsible Government Contracting Area Director or designee
makes all formal size determinations in response to either a size
protest or a request for a formal size determination, with the
exception of size determinations for purposes of the Disaster Loan
Program, which will be made by the Disaster Area Office Director or
designee responsible for the area in which the disaster occurred.
[[Page 3301]]
Sec. 121.1003 Where should a size protest be filed?
A protest involving a government procurement or sale must be filed
with the contracting officer for the procurement or sale, who must
forward the protest to the SBA Government Contracting Area Office
serving the area in which the headquarters of the protested concern is
located, regardless of the location of any parent company or
affiliates.
Sec. 121.1004 What time limits apply to protests?
(a) Protests by entities other than contracting officers or SBA.
(1) Non-negotiated procurement or sale. A protest must be received by
the contracting officer prior to the close of business on the 5th day,
exclusive of Saturdays, Sundays, and legal holidays, after bid or
proposal opening.
(2) Negotiated procurement. A protest must be received by the
contracting officer prior to the close of business on the 5th day,
exclusive of Saturdays, Sundays, and legal holidays, after the
contracting officer has notified the protestor of the identity of the
prospective awardee.
(3) Multiple award schedule. On a multiple award schedule
procurement set aside for small business, protests will be considered
timely if received by SBA at any time prior to the expiration of the
contract period (including renewals).
(b) Protests by contracting officers or SBA. The time limitations
in paragraph (a) of this section do not apply to contracting officers
or SBA, and they may file protests before or after awards, except to
the extent set forth in paragraph (e) of this section.
(c) Effect of contract award. A timely filed protest applies to the
procurement in question even though a contracting officer awarded the
contract prior to receipt of the protest.
(d) Untimely protests. A protest received after the allotted time
limits must still be forwarded to SBA. SBA will dismiss untimely
protests.
(e) Premature protests. A protest filed by any party, including the
contracting officer, before bid opening or notification to offerors of
the selection of the apparent successful offer will be dismissed as
premature.
Sec. 121.1005 How must a protest be filed with the contracting
officer?
A protest must be delivered to the contracting officer by hand,
telegram, mail, FAX, or telephone. If a protest is made by telephone,
the contracting officer must later receive a confirming letter either
within the 5-day period in Sec. 121.1004(a)(1) or postmarked no later
than one day after the date of the telephone protest.
Sec. 121.1006 When will a size protest be referred to an SBA
Government Contracting Area Office?
(a) A contracting officer who receives a protest (other than from
SBA) must forward the protest promptly to the SBA Government
Contracting Area Office serving the area in which the headquarters of
the offeror is located.
(b) A contracting officer's referral must contain the following
information:
(1) The protest and any accompanying materials;
(2) A copy of the self-certification as to size;
(3) Identification of the applicable size standard;
(4) A copy of the solicitation;
(5) Identification of the date of bid opening or notification
provided to unsuccessful offerors;
(6) The date on which the protest was received; and
(7) A complete address and point of contact for the protested
concern.
Sec. 121.1007 Must a protest of size status relate to a particular
procurement and be specific?
(a) Particular procurement. A protest challenging the size of a
concern which does not pertain to a particular procurement or sale will
not be acted on by SBA.
(b) A protest must include specific facts. A protest must be
sufficiently specific to provide reasonable notice as to the grounds
upon which the protested concern's size is questioned. Some basis for
the belief or allegation stated in the protest must be given. A protest
merely alleging that the protested concern is not small or is
affiliated with unnamed other concerns does not specify adequate
grounds for the protest. No particular form is prescribed for a
protest. Where materials supporting the protest are available, they
should be submitted with the protest.
(c) Non-specific protests will be dismissed. Protests which do not
contain sufficient specificity will be dismissed by SBA.
Sec. 121.1008 What happens after SBA receives a size protest or a
request for a formal size determination?
(a) When a size protest is received, the SBA Government Contracting
Area Director, or designee, will promptly notify the contracting
officer, the protested concern, and the protestor that a protest has
been received. In the event the size protest pertains to a requirement
involving SBA's SBIR Program, the Government Contracting Area Director
will advise the Assistant Administrator for Technology of the receipt
of the protest. SBA will provide a copy of the protest to the protested
concern along with a blank SBA Application for Small Business Size
Determination (SBA Form 355) by certified mail, return receipt
requested, or by any overnight delivery service that provides proof of
receipt. SBA will ask the protested concern to respond to the
allegations of the protestor.
(b) When SBA receives a request for a formal size determination in
accord with Sec. 121.1001(b), SBA will provide a blank copy of SBA Form
355 to the concern whose size is at issue.
(c) The protested concern or concern whose size is at issue must
return the completed SBA Form 355 and all other requested information
to SBA within 3 working days from the date of receipt of the blank form
from SBA. SBA has discretion to grant an extension of time to file the
form. The firm must attach to the completed SBA Form 355 its answers to
the allegations contained in the protest, where applicable, together
with any supporting material.
(d) If a concern does not submit a completed SBA Form 355, answers
to the protest allegations, or other requested information within the
allotted time provided by SBA, or if it submits incomplete information,
SBA may presume that disclosure of the form, any information missing
from it, or other missing information would show or tend to show that
the concern is other than a small business.
Sec. 121.1009 What are the procedures for making the size
determination?
(a) Time frame for making size determination. After receipt of a
protest or a request for a formal size determination, SBA will make a
formal size determination within 10 working days, if possible.
(b) Basis for determination. The size determination will be based
primarily on information supplied by the protestor or the entity
requesting the size determination and the subject concern. The
determination, however, may also be based on other grounds not raised
in the protest or request for size determination. SBA may utilize other
information in its files and may make inquiries including requests to
the protestor, the protested concern and any alleged affiliates, or
other persons for additional specific information.
(c) Burden of persuasion. The concern whose size is under
consideration has the burden of establishing its small business size.
[[Page 3302]]
(d) Weight of evidence. SBA will give greater weight to specific,
signed, factual evidence than to general, unsupported allegations or
opinions. In the case of refusal or failure to furnish requested
information within a required time period, SBA may assume that
disclosure would be contrary to the interests of the party failing to
make disclosure.
(e) Formal size determination. The SBA will base its formal size
determination upon the record, including reasonable inferences from the
record, and will state in writing the basis for its findings and
conclusions.
(f) Notification of determination. SBA will promptly notify the
contracting officer, the protestor, and the protested offeror, as well
as each affiliate or alleged affiliate, of the size determination. The
notification will be by certified mail, return receipt requested, or by
any overnight delivery service that provides proof of receipt.
(g) Results of an SBA size determination. (1) A formal size
determination becomes effective immediately and remains in full force
and effect unless and until reversed by OHA.
(2) Once SBA has determined that a concern is other than small for
purposes of a particular procurement, the concern cannot later become
eligible for the procurement by reducing its size.
(3) A concern determined to be other than small for a particular
size standard is ineligible for any procurement or assistance
authorized by the Small Business Act or the Small Business Investment
Act of 1958, requiring the same or a lower size standard, unless
recertified as small pursuant to Sec. 121.1010. Following an adverse
size determination, a concern cannot again self-certify as small within
the same or a lower size standard unless it is recertified as small by
SBA. If it does so, it may be in violation of criminal laws, including
section 16(d) of the Small Business Act, 15 U.S.C. 645(d). If the
concern has already certified itself as small on a pending procurement
or on another assistance application, the concern must immediately
inform the officials responsible for the pending procurement or other
requested assistance of the adverse size determination.
(h) Limited reopening of size determinations. In cases where the
size determination contains clear administrative error or a clear
mistake of fact, SBA may, in its sole discretion, reopen the size
determination to correct the error or mistake, provided the case has
not been accepted for review by OHA.
Sec. 121.1010 How does a concern become recertified as a small
business?
(a) A concern may request SBA to recertify it as small at any time
by filing an application for recertification with the Government
Contracting Area Office responsible for the area in which the
headquarters of the applicant is located, regardless of the location of
parent companies or affiliates. No particular form is prescribed for
the application; however, the request for recertification must be
accompanied by a current completed SBA Form 355 and any other
information sufficient to show a significant change in its ownership,
management, or other factors bearing on its status as a small concern.
(b) Recertification will not be required nor will the prohibition
against future self-certification apply if the adverse SBA size
determination is based solely on a finding of affiliation due to a
joint venture (e.g., ostensible subcontracting) limited to a particular
Government procurement or property sale, or is based on an ineligible
manufacturer where the eligible small business bidder or offeror is a
nonmanufacturer on a particular Government procurement.
(c) A denial of an application for recertification is a formal size
determination and may be reviewed by OHA at the discretion of that
office.
(d) The granting of an application for recertification has future
effect only. While it is a formal size determination, notice of
recertification is required to be given only to the applicant.
Appeals of Size Determinations and SIC Code Designations
Sec. 121.1101 Are formal size determinations subject to appeal?
There is no right of appeal of a size determination. OHA, however,
may, in its sole discretion, review a formal size determination made by
a SBA Government Contracting Area Office or by a Disaster Area Office.
Unless OHA accepts a petition for review of a formal size
determination, the size determination made by a SBA Government
Contracting Area Office or by a Disaster Area Office is the final
decision of SBA. The procedures for requesting discretionary reviews by
OHA of formal size determinations are set forth in part 134 of this
chapter.
Sec. 121.1102 Are SIC code designations subject to appeal?
Appeals may be made to OHA, which has exclusive jurisdiction to
determine appeals of SIC code designations pursuant to part 134 of this
chapter.
Sec. 121.1103 What are the procedures for appealing a SIC code
designation?
(a) Generally, any interested party who has been adversely affected
by a SIC code designation may appeal the designation to OHA. However,
with respect to a particular MED contract, only the Associate
Administrator for MED may appeal.
(b) Procedures for perfecting SIC code appeals with OHA are
contained in Sec. 19.303 of the Federal Acquisition Regulations, 48 CFR
19.303.
Subpart B--Other Applicable Provisions
Waivers of the Nonmanufacturer Rule for Classes of Products and
Individual Contracts
Sec. 121.1201 What is the Nonmanufacturer Rule?
The Nonmanufacturer Rule is set forth in Sec. 121.406(b).
Sec. 121.1202 When will a waiver of the Nonmanufacturer Rule be
granted for a class of products?
(a) A waiver for a class of products (class waiver) will be granted
when there are no small business manufacturers or processors available
to participate in the Federal market for that class of products.
(b) Federal market means acquisitions by the Federal Government
from offerors located in the United States, or such smaller area as SBA
designates if it concludes that the class of products is not supplied
on a national basis.
(1) When considering the appropriate market area for a product, SBA
presumes that the entire United States is the relevant Federal market,
unless it is clearly demonstrated that a class of products cannot be
procured on a national basis. This presumption may be particularly
difficult to overcome in the case of manufactured products, since such
items typically have a market area encompassing the entire United
States.
(2) When considering geographic segmentation of a Federal market,
SBA will not necessarily use market definitions dependent on airline
radius, political, or SBA regional boundaries. Market areas typically
follow established transportation routes rather than jurisdictional
borders. SBA examines the following factors, among others, in cases
where geographic segmentation for a class of products is urged:
(i) Whether perishability affects the area in which the product can
practically be sold;
(ii) Whether transportation costs are high as a proportion of the
total value
[[Page 3303]]
of the product so as to limit the economic distribution of the product;
(iii) Whether there are legal barriers to transportation of the
item;
(iv) Whether a fixed, well-delineated boundary exists for the
purported market area and whether this boundary has been stable over
time; and
(v) Whether a small business, not currently selling in the defined
market area, could potentially enter the market from another area and
supply the market at a reasonable price.
(c) Available to participate in the context of the Federal market
means that contractors exist that have been awarded or have performed a
contract to supply a specific class of products to the Federal
Government within 24 months from the date of the request for waiver,
either directly or through a dealer, or who have submitted an offer on
a solicitation for that class of products within that time frame.
(d) Class of products is an individual subdivision within a four-
digit Industry Number as established by the Office of Management and
Budget in the SIC Manual.
Sec. 121.1203 When will a waiver of the Nonmanufacturer Rule be
granted for an individual contract?
An individual waiver for a product in a specific solicitation will
be approved when the SBA Associate Administrator for Government
Contracting reviews and accepts a contracting officer's determination
that no small business manufacturer or processor can reasonably be
expected to offer a product meeting the specifications of a
solicitation, including the period of performance.
Sec. 121.1204 What are the procedures for requesting and granting
waivers?
(a) Waivers for classes of products. (1) SBA may, at its own
initiative, examine a class of products for possible waiver of the
Nonmanufacturer Rule.
(2) Any interested person, business, association, or Federal agency
may submit a request for a waiver for a particular class of products.
Requests should be addressed or hand-carried to the Associate
Administrator of Government Contracting, Small Business Administration,
409 3rd Street S.W., Washington, D.C. 20416.
(3) Requests for a waiver of a class of products need not be in any
particular form, but should include a statement of the class of
products to be waived, the applicable SIC code, and detailed
information on the efforts made to identify small business
manufacturers or processors for the class.
(4) If SBA decides that there are small business manufacturers or
processors in the Federal procurement market, it will deny the request
for waiver, issue notice of the denial, and provide the names,
addresses, and telephone numbers of the sources found. If SBA does not
initially confirm the existence of small business manufacturers or
processors in the Federal market, it will:
(i) Publish notices in the Commerce Business Daily and the Federal
Register seeking information on small business manufacturers or
processors, announcing a notice of intent to waive the Nonmanufacturer
Rule for that class of products and affording the public a 15-day
comment period; and
(ii) If no small business sources are identified, publish a notice
in the Federal Register stating that no small business sources were
found and that a waiver of the Nonmanufacturer Rule for that class of
products has been granted.
(5) An expedited procedure for issuing a class waiver may be used
for emergency situations, but only if the contracting officer provides
a determination to the Associate Administrator for Government
Contracting that the procurement is proceeding under the authority of
FAR Sec. 6.302-2 (48 CFR 6.302-2) for ``unusual and compelling
urgency,'' or provides a determination materially the same as one of
unusual and compelling urgency. Under the expedited procedure, if a
small business manufacturer or processor is not identified by a PASS
search, the SBA will grant the waiver for the class of products and
then publish a notice in the Federal Register. The notice will state
that a waiver has been granted, and solicit public comment for future
procurements.
(6) The decision by the Associate Administrator for Government
Contracting to grant or deny a waiver is the final decision by the
Agency.
(7) A waiver of the Nonmanufacturer Rule for classes of products
has no specific time limitation. SBA will, however, periodically review
existing class waivers to the Nonmanufacturer Rule to determine if
small business manufacturers or processors have become available to
participate in the Federal market for the waived classes of products
and the waiver should be terminated.
(i) Upon SBA's receipt of evidence that a small business
manufacturer or processor exists in the Federal market for a waived
class of products, the waiver will be terminated by the Associate
Administrator for Government Contracting. This evidence may be
discovered by SBA during a periodic review of existing waivers or may
be brought to SBA's attention by other sources.
(ii) SBA will announce its intent to terminate a waiver for a class
of products through the publication of a notice in the Federal
Register, asking for comments regarding the proposed termination.
(iii) Unless public comment reveals that no small business
manufacturer or processor in fact exists for the class of products in
question, SBA will publish a final Notice of Termination in the Federal
Register.
(b) Individual waivers for specific solicitations. (1) A
contracting officer's request for a waiver of the Nonmanufacturer Rule
for specific solicitations need not be in any particular form, but
must, at a minimum, include:
(i) A definitive statement of the specific item to be waived and
justification as to why the specific item is required;
(ii) The solicitation number, SIC code, dollar amount of the
procurement, and a brief statement of the procurement history;
(iii) A determination by the contracting officer that there are no
known small business manufacturers or processors for the requested
items (the determination must contain a narrative statement of the
contracting officer's efforts to search for small business
manufacturers or processors of the item and the results of those
efforts, and a statement by the contracting officer that there are no
known small business manufacturers for the items and that no small
business manufacturer or processor can reasonably be expected to offer
the required items); and
(iv) For contracts expected to exceed $500,000, a copy of the
Statement of Work.
(2) Requests should be addressed to the Associate Administrator for
Government Contracting, Small Business Administration, 409 3rd Street,
S.W., Washington, D.C. 20416.
(3) SBA will examine the contracting officer's determination and
any other information it deems necessary to make an informed decision
on the individual waiver request. If SBA's research verifies that no
small business manufacturers or processors exist for the item, the
Associate Administrator for Government Contracting will grant an
individual, one-time waiver. If a small business manufacturer or
processor is found for the product in question, the Associate
Administrator will deny the request. Either decision represents a final
decision by SBA.
[[Page 3304]]
Sec. 121.1205 How is a list of previously granted class waivers
obtained?
A list of classes of products for which waivers of the
Nonmanufacturer Rule have been granted will be maintained in SBA's
Procurement Automated Source System (PASS). A list of such waivers may
also be obtained by contacting the Office of Government Contracting at
the Small Business Administration, 409 3rd Street, S.W., Washington,
D.C. 20416, or at the nearest SBA Government Contracting Area Office.
Dated: January 22, 1996.
John T. Spotila,
Acting Administrator.
[FR Doc. 96-1348 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P
Complete official Federal Register PDF
FR Doc. 96-1347 Surety Bond Guarantee
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3266-3280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1347]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 115
Surety Bond Guarantee
AGENCY: Small Business Administration (SBA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule revises the regulations found at 13 CFR Part
115, governing the Surety Bond Guarantee (SBG) Program. It eliminates
inconsistencies, clarifies procedures, accommodates program experience
and industry changes, and provides for more efficient program
operation. It also clarifies and shortens regulations where
appropriate, eliminates redundant provisions, consolidates and
reorganizes sections, and clarifies ambiguous language.
EFFECTIVE DATE: This final rule is effective March 1, 1996.
FOR FURTHER INFORMATION CONTACT: Barbara Brannan, Office of Surety
Guarantees, (202) 205-6540.
SUPPLEMENTARY INFORMATION: In response to a Memorandum from President
Clinton for all federal agencies to simplify their regulations, SBA
published a proposed rule on November 27, 1995, to revise the
regulations governing the Surety Bond Guarantee Program. See 60 FR
58263 (November 27, 1995). The public was afforded a thirty-day period
in which to submit comments on the proposed rule to SBA. During that
period, SBA received 12 comment letters. After giving careful
consideration to the concerns raised in those letters, SBA is today
finalizing the proposed rule with certain modifications discussed
below.
General Comments
Those comment letters that addressed the proposed renumbering and
reorganization of Part 115 commended the rewrite for its clarity and
comprehensibility. Those aspects of the proposed rule are being
finalized as proposed. In this final rule, SBA has continued its effort
to simplify Part 115 by creating smaller sections out of the largest
proposed section (Sec. 115.60). Subsequent sections (Secs. 115.61
through 115.64) have been renumbered to accommodate this change.
Definitions--Contract, etc.
All three of the comments received on the proposed change to the
definition of ``contract'' objected to the exclusion of maintenance
agreements covering defective materials. Under the proposal, a
maintenance agreement covering defective workmanship would be
considered a contract, but a maintenance agreement covering defective
materials would not. It was argued in the comments that the typical
maintenance agreement in use today covers both defective workmanship
and defective materials. On reconsideration, SBA agrees that the
definition of contract should permit coverage of defective materials
since that accords with standard practice in the industry today. The
definition is finalized accordingly. The final version also clarifies
that maintenance agreements of longer than two years duration can be
considered contracts if they meet the requirements set forth in the
definition.
A new defined term has also been added to the final rule: ``final
bond''. The term means a performance bond and/or a payment bond. This
is one of several non-substantive changes SBA is making in the final
rule to make the regulations clearer.
Eligibility of Payment Bonds
Proposed Sec. 115.12(b) would have allowed payment bonds to be
guaranteed by SBA only if performance bonds were issued at the same
time. As four comment letters pointed out, recent amendments to the
Miller Act eliminate the bonding requirement for federal contracts of
less than $100,000, but allow for certain alternatives to protect
subcontractors and suppliers against non-payment by the general
contractor. As one alternative, the contracting officer may require a
payment bond on the contract. Under SBA's proposed change to
Sec. 115.12(b), contractors in the SBG Program would have been unable
to bid on those small public contracts that require payment bonds only.
Given the recent Miller Act changes, SBA agrees that payment bonds
should not automatically be considered ineligible for guaranteed
bonding when no performance bond is issued. The final version of
Sec. 115.12(b), therefore, does not restrict the eligibility of payment
bonds. However, SBA does not intend to guarantee payment bonds that are
essentially forfeiture bonds. If a payment bond allows the claimant to
receive the full amount of the bond from the surety regardless of the
amount of the damage or loss the claimant has
[[Page 3267]]
actually suffered, the bond is a forfeiture bond. The definition of
payment bond has been changed in this final rule to clarify that no
forfeiture bonds will be guaranteed by SBA.
In response to a comment from the Surety Association of America, a
technical change to proposed Sec. 115.12(b) is also being adopted. The
reference in the current and proposed regulation to the Surety
Association's ``Rating Manual'' has been changed to its ``Manual of
Rules, Procedures and Classifications'' to conform to the Association's
current name for its publication.
Transfer of Surety's Files
SBA's proposal to prohibit the transfer or sale of surety files and
accounts is finalized with certain changes to clarify SBA's intent. As
the commenters surmised, the provision (proposed Sec. 115.12(f)) was
not intended to apply to the sale of a surety's entire property and
casualty operations. SBA does not want to restrict the sale of a
surety's entire book of business. In addition to this clarification,
the final rule now provides that when the prohibition against the
transfer or sale of files and accounts does apply, it can be overridden
with SBA's prior approval.
Principal's Eligibility
Several comment letters expressed concern regarding SBA's proposal
to exclude from participation in the SBG Program those principals who
are primarily brokers or construction managers. SBA recognizes that
many small general contractors subcontract out a high percentage of the
work under a contract. This is not necessarily objectionable. Rather,
SBA is trying to weed out those principals whose subcontracting results
in the principal losing control over the project. In the most egregious
cases, the principal may be fronting for the subcontractor. This
objectionable activity may not be discernible solely from the
percentage of work subcontracted on a project, although that is often a
good indicator. To clarify SBA's position, proposed Sec. 115.13(e) has
been rewritten to delete the reference to ``construction managers''.
Instead, the final version excludes from participation in the SBG
Program principals who are brokers or who, through subcontracting out
work under the contract, have effectively lost control over the
project. The final version (now designated Sec. 115.13(a)(5)) still
requires principals to specify the percentage of work under the
contract to be subcontracted.
Proposed Sec. 115.13(g) seems to have created a misunderstanding.
It was not SBA's intent to prohibit a contractor whose spouse works for
a surety company from obtaining bonds through the SBG Program. Such
``conflicts of interest'' would not preclude contractors from
participating in the program, but they might bar contractors from
obtaining guaranteed bonds through the ``affiliated'' surety. For
example, if the spouse of a contractor (1) is ``empowered to act on
behalf of the surety'' (and is therefore included under the definition
of ``surety'') and (2) is considered to own at least 10% of the
contractor business, then that surety company can not issue a
guaranteed bond for that contractor. Any other surety company in the
SBG Program, however, could issue a guaranteed bond for that principal.
The final version of the subsection (now designated Sec. 115.13(b))
clarifies that it addresses the eligibility of a principal to receive
guaranteed bonds issued by a particular surety, not by all sureties in
the SBG Program. The other paragraphs in the section have been
relettered accordingly.
Loss of Principal's Eligibility
Subsections (1) and (2) of proposed Sec. 115.14(a) provided that
principals would lose eligibility for further SBA bond guarantees if
legal action under the bond had been initiated or if the principal had
been declared in default under the contract. The comments received on
these two paragraphs questioned the wisdom of an automatic loss of
eligibility under these two situations. It was argued that taking such
action could cause financial hardship to the contractor and might even
put the contractor out of business. The suggestion was made that the
surety company's underwriter or claims department should make the
determination as to loss of a principal's eligibility in these two
cases.
SBA believes that the subsections governing a principal's loss of
eligibility must be read in conjunction with the section on reinstating
the principal's eligibility (proposed Sec. 115.36(b)). SBA is rewording
proposed Sec. 115.36(b) to allow for reinstatement of the principal's
eligibility in the event SBA and the surety agree to reinstate. With
that change, if legal action is initiated under the bond, or if any of
the other events in Sec. 115.14(a) occurs, the principal still loses
eligibility for further guaranteed bonding, but reinstatement of
eligibility can occur almost immediately if both SBA and the surety
agree it is appropriate. SBA expects that, with that mechanism in
place, frivolous lawsuits and baseless claims under the bond will not
stand in the way of further guaranteed bonding of an otherwise eligible
principal. Subsections (1) and (2) of proposed Sec. 115.14(a) are
therefore unchanged in the final rule.
Subsection (3) of proposed Sec. 115.14(a) provided that a
principal's eligibility would be lost if the surety established a claim
reserve for the bond in excess of $100. All five of the comments
received on this subsection objected to the $100 threshold as too low.
The argument was made that some sureties routinely set up a claim
reserve in excess of $100 every time a trouble notice is received on a
project, and that claim reserves do not necessarily reflect actual loss
potential. Two of the comments recommended a $500 claim reserve as the
minimum level which indicated the potential for serious loss.
SBA's proposal had been intended as a liberalization of the current
regulation (Sec. 115.34(a)), which provides that a claim reserve of any
amount results in automatic loss of the principal's eligibility. SBA
believes, though, that with the other triggers for loss of eligibility
in place in Sec. 115.14(a), it is appropriate to increase the minimum
claim reserve threshold. SBA has concluded that claim reserves below
$1000 should not result in the loss of the principal's eligibility. The
rule is finalized accordingly.
A new provision has been added to Sec. 115.14(b) to clarify that in
the PSB Program a principal's eligibility is reinstated upon the
surety's own determination that reinstatement is appropriate.
Underwriting and Servicing Standards
Four comments were received on the proposed rewrite of the
program's underwriting standards (proposed Sec. 115.15(a)). All were
opposed to the proposed 150% limit on contracts for contractors new to
the SBG Program. SBA had intended the 150% limit as general guidance
for underwriting decisions, not as an absolute requirement. Upon
reconsideration, SBA believes that underwriting guidelines need not
appear in the regulations. Accordingly, the guidance on limits for
contractors new to the SBG Program is being moved to an SBA Standard
Operating Procedure (SOP) for the SBG Program. Also moved to the SOP
are SBA's recommendations as to type and size of contract for
guaranteed bonding and other general underwriting guidelines. SBA
expects that sureties will follow the recommendations in the SOP when
making their underwriting determinations. The balance of Sec. 115.15(a)
is finalized as proposed.
Four comments were also received on the proposed rewrite of the
program's
[[Page 3268]]
servicing standards (proposed Sec. 115.15(b)). All four addressed the
requirement for sureties to obtain job status reports from obligees on
final bonds guaranteed by SBA. The comments pointed out the difficulty
in obtaining job status reports from an obligee who refuses to respond
to job status inquiries. SBA agrees that sureties should not be held to
a requirement that is outside of their control. Instead of requiring
sureties to obtain job status reports, therefore, the final rule
provides that sureties must request job status reports and document the
request in their files.
Determination of Loss
Two comment letters asked for clarification of the terms ``mark-up
on expenses'' and ``overhead,'' as used in the computation of the
surety's ``loss'' in proposed Sec. 115.16(f)(1). The proposal would
have prohibited reimbursement from SBA for any mark-up on expenses or
any overhead of ``the surety, its attorney or any other party.'' SBA
believes the terms in question are generally understood business terms,
but that some confusion may have been generated by the words ``or any
other party.'' SBA is remedying that problem by changing the words to
``or any other party hired by the Surety or the attorney.'' In
particular, consultants hired by either the surety or the surety's
counsel cannot indirectly charge SBA for their overhead or for anything
over their actual costs.
Using photocopying costs as an example, the restriction on mark-up
on expenses would mean that if the surety's attorney copies documents
on its office xerox machine and charges the surety for its actual per
copy cost, plus 20%, the surety cannot include in ``loss'' the 20%
excess over the attorney's actual cost of making those copies. The same
would be true of photocopying by the surety itself; only the actual per
copy cost could be included in loss. If the surety or the attorney has
documents copied at a photocopying store, however, the amount of the
copying expense included in the surety's loss is the full amount the
store charges the surety or the attorney, regardless of the actual cost
to the store of that job. The retailer's markup is a permitted expense
because the retailer has not been ``hired'' by the surety.
In general, SBA would consider ``mark-up on expenses'' to include
any add-on to the actual cost of an expense item. ``Overhead'' means
the general costs of running a business. Some examples of overhead
include rent, electricity, and heating and air conditioning costs.
Salvage and Recovery
SBA received three comments on proposed Sec. 115.17(b)(2), the
subsection establishing SBA's share of the salvage and recovery
received by a surety when a principal defaults on a bonded contract
that SBA has guaranteed. The three comments opposed SBA's proposal that
it share not only in any recovery received by the surety in connection
with the guaranteed bond for the principal, but also in any recovery
received in connection with any other bond issued by the surety on
behalf of that principal. The commenters suggested that the surety be
allowed to apply contract funds from the defaulted non-guaranteed
project to that project's losses first, and then give SBA any excess it
receives. Ordinarily, the excess would be paid over to the principal.
Upon reconsideration, SBA believes its proposal was overly broad.
Under the final rule, SBA will not share in contract proceeds and other
forms of salvage and recovery that are clearly identifiable as related
solely to a bonded contract that SBA has not guaranteed. On the other
hand, if the surety's recovery could apply to both a contract without a
guaranteed bond and a contract with a guaranteed bond, SBA will be
entitled to its share of the entire amount of that recovery. For
example, if the surety collects from an individual who has indemnified
the surety for its losses under both a guaranteed bond and a non-
guaranteed bond, the entire recovery from that party will be assumed to
relate to the guaranteed bond for purposes of determining SBA's share.
Renegotiation of guarantee percentage
Several comment letters requested clarification of SBA's ability
under proposed Sec. 115.18(a)(3) to renegotiate a surety's guarantee
percentage in the event the surety experiences excessive losses. In
response to those requests, SBA assures the participants in the SBG
Program that the guarantee percentage for bonds already written by a
surety cannot be renegotiated. In the event a surety's losses are
determined to be excessive by SBA, the surety may be required to
renegotiate the guarantee percentage for bonds issued after that date.
The final version of proposed Sec. 115.18(a)(3), now designated
Sec. 115.18(a)(4), clarifies this point.
Denial of Liability--Excess Bond Amount
Under proposed Sec. 115.19(a), SBA would not be liable under its
guarantee if the bond amount at any time exceeded the total contract
amount determined at the time of the bond's execution. The four
comments received on this subsection made two points. The first point
was that certain public (government) projects require bonding in excess
of 100% of the contract amount. An exception for such projects was
requested. SBA's proposal limiting bonds to 100% of the contract
amount, while new to the regulations, has long been a policy of the SBG
Program. The restriction has been a part of the Program's Standard
Operating Procedure for over ten years. See SOP 50 45, Revision 1, page
22. The reason for the restriction is that SBA has determined that any
situation in which the surety and SBA have a greater liability than the
obligee is inherently not reasonable in light of the risks involved. It
would be statutorily impermissible for SBA to issue a guarantee under
those circumstances. See 15 USC 694b(a)(4)(D). Public projects
requiring bonding in excess of 100% will have to continue to be bonded
outside of the SBG Program.
The second point raised in the comment letters was that as contract
amounts increase by change order, bond amounts may increase as well. If
the bond can never exceed the original contract amount, there is no
possibility for increases in the bond amount when the contract amount
is increased. SBA has reconsidered its position on this issue. The
final rule permits the bond amount to exceed the original contract
amount but, as discussed in the preceding paragraph, the bond amount
must never exceed the contract amount measured at the same time.
Denial of Liability--Substantial Regulatory Violation
Under proposed Sec. 115.19(d), SBA would not be liable under its
guarantee if the surety committed a substantial violation. A
substantial violation was proposed to include a violation which caused
an increase in the contract or bond amount of 25% or $50,000. Upon
consideration of the one comment received on this paragraph, SBA has
concluded that it is extremely unlikely that a regulatory violation
could cause an increase in the contract amount. SBA's real concern is
with increases in the bond amount. The final rule deletes the reference
to the contract amount in Sec. 115.19(d).
[[Page 3269]]
Denial of Liability--Alteration
Under proposed Sec. 115.19(e), SBA would not be liable under its
guarantee if the surety agreed to or acquiesced in any material
alteration of the contract or bond without SBA's prior written
approval. This differs from the current regulation, Sec. 115.13(e),
which does not include alterations in the contract as a basis for SBA
to deny liability. The single comment received on proposed
Sec. 115.19(e) pointed out that the standard bond form in the surety
industry provides that the surety waives notice of changes to the
contract. Changes to the contract frequently occur without any approval
from the surety. Accordingly, SBA has decided to remove contract
alterations as a basis for denial of liability in the final rule.
Denial of Liability--Timeliness
Under proposed Sec. 115.19(f), SBA would not be liable under its
guarantee if the surety executed the bond before SBA's guarantee was
executed. This provision complies with the statutory requirement that
an SBA bond guarantee may be issued only if the principal is not able
to obtain the bond on reasonable terms and conditions without the
guarantee. See 15 USC 694b(a)(4)(C). A bond dated prior to SBA's
guarantee is a bond that is obtainable without such guarantee.
The two comments received on this subsection expressed concern that
the current industry practice of back-dating the bond at the request of
the obligee could result in an SBA determination to deny liability
under the guarantee. Apparently, many obligees require that the bond be
dated the same date as the contract, regardless of the actual execution
date of the bond. SBA does not object to a bond carrying an ``effective
date'' (e.g., ``dated as of July 1, 1996'') that is earlier than its
execution date (e.g., ``signed July 20, 1996'') as long as there is
proper documentation of the actual date of execution of the bond and
such execution date is no earlier than the date of SBA's guarantee. SBA
does not believe that any change to the proposed language in
Sec. 115.19(f) is necessary, as the proposal speaks only of execution
of the bond. The provision is finalized as proposed.
Denial of Liability--Other Regulatory Violations
In accordance with the suggestion in the one comment received on
proposed Sec. 115.19(h)(6), SBA is correcting the language of the
proposed subsection to clarify that sureties are permitted to make
payments under payment bonds even though such payments may not result
from the principal's breach of the bonded contract. SBA had not
intended for the proposal to be interpreted any other way. The final
version of Sec. 115.19(h)(6) makes this technical correction.
Audits and Investigations
In connection with the requirement under the final version of
Sec. 115.15(b) for sureties to document the job status inquiries they
make, SBA is including such documentation, together with any job status
reports received by the surety, in the list of records required to be
maintained by the surety under the final version of Sec. 115.21(b).
Prior Approval Program--SBA Approval
SBA is finalizing proposed Sec. 115.30(b) without change. The
proposal, which provided that SBA's written approval of a guarantee
application would control over any conflicting verbal approval, was not
different substantively from the current regulation (Sec. 115.31(a)).
Nevertheless, SBA appreciates the concern of the two commenters who
requested some protection for sureties relying on a verbal approval
from an SBA officer, only to learn that the guarantee agreement was not
signed until the following day. SBA intends to make clear to all SBG
Program personnel that no verbal approval of a guarantee application
may be communicated unless the guarantee application has already been
executed by an authorized official. Sureties requiring greater
certainty than the regulation affords are advised to request a telecopy
of the signed guarantee form as confirmation.
Prior Approval Program--Principal's and Surety's Fees
Ten of the eleven comments received on the proposed increase in the
principal's fee (proposed Sec. 115.32(b)) were opposed to the increase.
The eleventh comment commended SBA's attempt to make the program self-
financing and recommended an even greater increase in the principal's
fee than had been proposed by SBA. The vast majority of the comments on
this topic, however, cited the adverse impact on the contractors and on
the SBG Program. In particular, there was concern that the increase
would impose a financial burden on the contractors in the program and
would result in a dramatic cut-back in program participation. Only the
higher risk contractors--those without collateral or other alternatives
to the SBG Program--were predicted to remain in the program.
Ten comments were also received on the proposed increase in SBA's
charge to the surety (proposed Sec. 115.32(c))--all opposed. According
to several sureties, writing bonds in the SBG Program already costs the
surety more than writing equivalent bonds with standard reinsurance. It
was predicted that some sureties would leave the program and that
sureties remaining in the program would attempt to pass the increase on
to the contractor by raising premium rates.
SBA has given careful consideration to the concerns surrounding the
proposed increases in the principal's fee and the surety's fee. SBA
continues to believe that the long-term goals of the SBG Program will
be best served if the program can become self-financing. However, the
costs of any transition to a self-funding program should not outweigh
the benefits to be derived from the change.
To allow time for further consideration, SBA has decided to keep
the fees at their current levels (.06% of the contract amount for the
principal fee; 20% of the bond premium for the surety fee) at this
time. Future changes in the fee percentages will be published by SBA in
the form of a Notice in the Federal Register. SBA is completing an
analysis of the performance of the SBG Program and evaluating whether
changes in the fees are warranted, and will publish a Notice within 30
days of the date of publication.
Prior Approval Program--Contract Increases/Decreases
Proposed Sec. 115.32(d) elicited nine comments from readers, none
of which supported the proposal. The proposal contained several
components. First, sureties would be required to notify SBA of all
increases or decreases in the contract or bond amount as soon as the
surety learned of the change. All notifications of increases would have
to be accompanied by the associated increase in the principal's fee.
The increase in the surety's fee would be payable in the ordinary
course of business. Under the current regulation, by contrast,
notification is required only when the changes in the contract or bond
amount aggregate at least $10,000 (current Sec. 115.35(c)). No increase
in the principal's or the surety's fee is computed at that time.
Second, under the proposal, any single change in the contract or
bond amount of at least 25% or $50,000 would require prior SBA
approval. Under the current regulation, changes in the bond amount
aggregating at least
[[Page 3270]]
25% or $50,000 require SBA's approval and simultaneous payment of any
increase in the principal's fee. The increase in the surety's fee is
payable in the normal course of business.
Third, under the proposal, payment for the increased fees would be
due and payable regardless of the size of the check. No exception would
be made for small sums. Under the current regulation, if the increase
in the principal's or the surety's fee is less than $40, the amount is
``disregarded''.
Fourth, under both the proposal and the current regulation,
decreases in the contract or bond amount are treated the same as
increases of an equivalent amount would be treated. Decreases resulting
in refunds from SBA of a portion of the principal's fee, however, are
paid directly to the principal under the proposal, but are paid to the
surety (who then transmits the refund to the principal) under the
current regulation.
The comment letters uniformly registered objections to the greater
administrative burden considered to be imposed by the proposed
notification and payment requirements. Opposition to the removal of the
$40 threshold was also expressed consistently, although some commenters
suggested a $100 threshold in its place. No objection was raised to the
proposed mechanism for refunding the excess principal's fee.
SBA has reconsidered its proposal in light of the comments
received. Instead of requiring notification of all increases and
decreases in the contract or bond amount, and the payment of associated
fees, the final rule requires notification of increases or decreases
only when they aggregate 25% of the contract or bond amount or $50,000.
Such notification must be accompanied by the increase in the
principal's fee; however, increases (or decreases) in the principal's
or the surety's fee will not be due and payable until they aggregate at
least $40. Increases in the surety's fee will be payable in the
ordinary course of business, as they are presently. Any single change
order that increases the bond amount by 25% or $50,000 will require the
prior approval of SBA. Except for the changes discussed in this
paragraph, Sec. 115.32(d) is finalized as proposed.
Prior Approval Program--Events Requiring Notification
Under proposed Sec. 115.35(a)(1)(iv), SBA would require sureties in
the Prior Approval Program to notify SBA if the surety were to receive
any adverse information concerning the principal's financial condition
or possible inability to complete the project or to pay laborers or
suppliers. One commenter expressed concern that if such notification
were to be the cause of a principal's loss of eligibility for the
program, lawsuits against the surety by the principal could follow. SBA
believes such concern to be unfounded. Section 115.14 of this final
rule details the grounds for a principal's loss of eligibility to
participate in the program; adverse information, absent anything else,
is not among the permitted grounds. SBA's proposal to require
notification of adverse information is adopted without change.
PSB Program--Premium Rates
The Surety Association of America has advised SBA that it no longer
keeps advisory premium rates for the surety industry. Proposed
Sec. 115.60(a)(2), as well as current Sec. 115.10(d)(2), require that
PSB Sureties charge principals no more than the Association's advisory
premium rates. The Association suggested using their advisory premium
rates in effect on August 1, 1987, as the standard. SBA considers that
a satisfactory solution for now, but will continue to explore
alternatives. The final version of Sec. 115.60(a)(2) incorporates that
change.
PSB Program--Retention of Information
SBA agrees with the two comment letters received on proposed
Sec. 115.60(g)(1). PSB Sureties should not be required to keep a record
of the time of execution of each bond. A record of the date of
execution of the bond is sufficient. The final version of the
subsection, redesignated Sec. 115.65(a), reflects this correction.
PSB Program--Principal's and Surety's Fees
The proposal to increase the principal's and surety's fees in the
PSB Program (Sec. 115.60(g)(4)) is being revised in the same manner as
the equivalent provisions in the Prior Approval Program. See the
discussion above under ``Prior Approval Program--Principal's and
Surety's fees.''
PSB Program--Contract Increases/Decreases
The final version of Sec. 115.60(g)(5), redesignated Sec. 115.67,
mirrors the changes made to the equivalent provision in the Prior
Approval Program (Sec. 115.32 (b) and (c)), as discussed above under
``Prior Approval Program--Contract increases/decreases.''
Miscellaneous
A comment from one of the surety trade associations was received on
the substitution of SBA form names for SBA form numbers in the proposed
rule. According to the comment, sureties refer to SBA documents by
their respective SBA form numbers, not names. SBA recognizes that the
names of its forms are not as familiar to program participants as its
form numbers. In order to avoid confusion, SBA has retained the form
numbers in the final rule.
In the Supplementary Information section of the proposed rule, SBA
discussed the proposed deletion of current Sec. 115.30(b), including
the requirement for the principal to file SBA Form 1624 (Lower Tier
Certification form) with its initial guarantee application. As SBA
explained, the requirement would be removed from the regulations and
would be issued as internal guidance, with the following change: the
Lower Tier Certification would have to be submitted with each
application for a principal, not simply the principal's first
application. One commenter objected to the change as overly burdensome.
Nevertheless, as was explained in the proposed rule, SBA believes the
change is necessary to comply with Part 146 of Title 13 of the Code of
Federal Regulations and that it is consistent with current practice in
SBA field offices.
Except as discussed above, SBA adopts as final its proposal to
amend Part 115.
Compliance With Executive Orders 12778, 12612 and 12866, the Regulatory
Flexibility Act and the Paperwork Reduction Act
SBA certifies that this final rule will not constitute a
significant regulatory action for purposes of Executive Order 12866,
since it is not likely to result in an annual effect on the economy of
$100 million or more.
For purposes of the Regulatory Flexibility Act, 5 U.S.C. 604, SBA
has determined that this rule will not have a significant impact on a
substantial number of small entities. Final action on the proposed
increases in the principal's and the surety's fees has been deferred
until further study of the issue has been completed. There are no fee
increases in this final rule.
There are no reporting, recordkeeping and other compliance
requirements not approved by the Office of Management and Budget which
would come under the Paperwork Reduction Act, 44 U.S.C. Ch. 35.
SBA certifies that this rule is drafted, to the extent practicable,
in accordance with the standards set forth in Section 2 of Executive
Order 12778.
SBA certifies that this regulation does not warrant the preparation
of a Federal
[[Page 3271]]
Assessment in accordance with Executive Order 12612.
List of Subjects in 13 CFR Part 115
Small business, Surety bonds.
For the above reasons, SBA is revising part 115, title 13 of the
Code of Federal Regulations, to read as follows:
PART 115--SURETY BOND GUARANTEE
Sec.
115.1 Overview of regulations.
115.2 Savings clause.
Subpart A--Provisions For All Surety Bond Guarantees
115.10 Definitions.
115.11 Applying to participate in the Surety Bond Guarantee
Program.
115.12 General program policies and provisions.
115.13 Eligibility of Principal.
115.14 Loss of Principal's eligibility for future assistance.
115.15 Underwriting and servicing standards.
115.16 Determination of Surety's Loss.
115.17 Minimization of Surety's Loss.
115.18 Refusal to issue further guarantees; suspension and
termination of PSB status.
115.19 Denial of liability.
115.20 Insolvency of Surety.
115.21 Audits and investigations.
Subpart B--Guarantees Subject to Prior Approval
115.30 Submission of Surety's guarantee application.
115.31 Guarantee percentage.
115.32 Fees and Premiums.
115.33 Surety bonding line.
115.34 Minimization of Surety's Loss.
115.35 Claims for reimbursement of Losses.
115.36 Indemnity settlements and reinstatement of Principal.
Subpart C--Preferred Surety Bond (PSB) Guarantees
115.60 Selection and admission of PSB Sureties.
115.61 Duration of PSB Program.
115.62 Prohibition on participation in Prior Approval Program.
115.63 Allotment of guarantee authority.
115.64 Timeliness requirement.
115.65 General PSB procedures.
115.66 Fees.
115.67 Changes in Contract or bond amount.
115.68 Guarantee percentage.
115.69 Imminent Breach.
115.70 Claims for reimbursement of Losses.
115.71 Denial of liability.
Authority: 5 U.S.C. app. 3; 15 U.S.C. 687b, 687c, 694a, 694b;
Pub. L. 101-574, 104 Stat. 2823 (1990).
Sec. 115.1 Overview of regulations.
The regulations in this part cover the SBA's Surety Bond Guarantee
Programs under Part B of Title IV of the Small Business Investment Act
of 1958, as amended. Subpart A of this part contains regulations common
to both the program requiring prior SBA approval of each bond guarantee
(the Prior Approval Program) and the program not requiring prior
approval (the PSB Program). Subpart B of this part contains the
regulations applicable only to the Prior Approval Program. Subpart C of
this part contains the regulations applicable only to the PSB Program.
Sec. 115.2 Savings clause.
Transactions affected by this part 115 are governed by the
regulations in effect at the time they occur.
Subpart A--Provisions for All Surety Bond Guarantees
Sec. 115.10 Definitions.
AA/SG means SBA's Associate Administrator for Surety Guarantees.
Affiliate is defined in part 121 of this chapter.
Ancillary Bond means a bond incidental and essential to the
performance of a Contract for which there is a guaranteed Final Bond.
Bid Bond means a bond conditioned upon the bidder on a Contract
entering into the Contract, and furnishing the required Payment and
Performance Bonds. The term does not include a forfeiture bond unless
it is issued for a jurisdiction where statute or settled decisional law
requires forfeiture bonds for public works.
Contract means a written obligation of the Principal requiring the
furnishing of services, supplies, labor, materials, machinery,
equipment, or construction. A Contract must not prohibit a Surety from
performing the Contract upon default of the Principal. A Contract does
not include a permit, subdivision contract, lease, land contract,
evidence of debt, financial guarantee (e.g., a contract requiring any
payment by the Principal to the Obligee), warranty of performance or
efficiency, warranty of fidelity, or release of lien (other than for
claims under a guaranteed bond). It includes a maintenance agreement of
2 years or less which covers defective workmanship or materials only.
With SBA's written approval, it can also include a longer maintenance
agreement covering defective workmanship or materials, or a maintenance
agreement covering something other than defective workmanship or
materials. To qualify for such approval, the agreement must be
ancillary to the Contract for which SBA is guaranteeing a bond, must be
required to be performed by the same Principal, and must be customarily
required in the relevant trade or industry.
Execution means signing by a representative or agent of the Surety
with the authority and power to bind the Surety.
Final Bond means a Performance Bond and/or a Payment Bond.
Imminent Breach means a threat to the successful completion of a
bonded Contract which, unless remedied by the Surety, makes a default
under the bond appear to be inevitable.
Investment Act means the Small Business Investment Act of 1958 (15
U.S.C. 661), as amended.
Loss has the meaning set forth in Sec. 115.16.
Obligee means:
(1)(i) In the case of a Bid Bond, the Person requesting bids for
the performance of a Contract; or
(ii) In the case of a Final Bond, the Person who has contracted
with a Principal for the completion of the Contract and to whom the
primary obligation of the Surety runs in the event of a breach by the
Principal.
(2) In either case, no Person (other than a Federal department or
agency) may be named co-Obligee or Obligee on a bond or on a rider to
the bond unless that Person is bound by the Contract to the Principal
(or to the Surety, if the Surety has arranged completion of the
Contract) to the same extent as the original Obligee. In no event may
the addition of one or more co-Obligees increase the aggregate
liability of the Surety under the bond.
OSG means SBA's Office of Surety Guarantees.
Payment Bond means a bond which is conditioned upon the payment by
the Principal of money to persons who have a right of action against
such bond, including those who have furnished labor, materials,
equipment and supplies for use in the performance of the Contract. A
Payment Bond can not require the Surety to pay an amount which exceeds
the claimant's actual loss or damage.
Performance Bond means a bond conditioned upon the completion by
the Principal of a Contract in accordance with its terms.
Person means a natural person or a legal entity.
Premium means the amount charged by a Surety to issue bonds. The
Premium is determined by applying an approved rate (see Secs. 115.32(a)
and 115.60(a)(2)) to the bond or contract amount. The Premium does not
include surcharges for extra services, whether or not considered part
of the ``premium'' under local law.
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Principal means, in the case of a Bid Bond, the Person bidding for
the award of a Contract. In the case of Final Bonds and Ancillary
Bonds, Principal means the Person primarily liable to complete the
Contract, or to make Contract-related payments to other persons, and is
the Person whose performance or payment is bonded by the Surety. A
Principal may be a prime contractor or a subcontractor.
Prior Approval Agreement means the Surety Bond Guarantee Agreement
(SBA Form 990) entered into between a Prior Approval Surety and SBA
under which SBA agrees to guarantee a specific bond.
Prior Approval Surety means a Surety which must obtain SBA's prior
approval on each guarantee and which has entered into one or more Prior
Approval Agreements with SBA.
PSB Agreement means the Preferred Surety Bond Guarantee Agreement
entered into between a PSB Surety and SBA.
PSB Surety means a Surety that has been admitted to the Preferred
Surety Bond (PSB) Program.
Surety means a company which:
(1)(i) Under the terms of a Bid Bond, agrees to pay a sum of money
to the Obligee if the Principal breaches the conditions of the bond;
(ii) Under the terms of a Performance Bond, agrees to pay a sum of
money or to incur the cost of fulfilling the terms of a Contract if the
Principal breaches the conditions of the Contract; and
(iii) Under the terms of a Payment or an Ancillary Bond, agrees to
make payment to all who have a right of action against such bond,
including those who have furnished labor, materials, equipment and
supplies in the performance of the Contract.
(2) The term Surety includes an agent, independent agent,
underwriter, or any other company or individual empowered to act on
behalf of the Surety.
Sec. 115.11 Applying to participate in the Surety Bond Guarantee
Program.
Sureties interested in participating as Prior Approval Sureties or
PSB Sureties should apply in writing to the AA/SG at 409 3rd Street,
SW., Washington, DC 20416. OSG will determine the eligibility of the
applicant considering its standards and procedures for underwriting,
administration, claims and recovery. Each applicant must be a
corporation listed by the U.S. Treasury as eligible to issue bonds in
connection with Federal procurement contracts.
Sec. 115.12 General program policies and provisions.
(a) Description of Surety Bond Guarantee Programs. SBA guarantees
Sureties participating in the Surety Bond Guarantee Programs against a
portion of their Losses incurred and paid as a result of a Principal's
breach of the terms of a Bid Bond, Final Bond or Ancillary Bond, on any
eligible Contract. In the Prior Approval Program, the Surety must
obtain SBA's approval before a guaranteed bond can be issued. In the
PSB Program, selected Sureties may issue, monitor, and service SBA
guaranteed bonds without further SBA approval.
(b) Eligibility of bonds. Bid Bonds and Final Bonds are eligible
for an SBA guarantee if they are executed in connection with an
eligible Contract and are of a type listed in the ``Contract Bonds''
section of the current Manual of Rules, Procedures and Classifications
of the Surety Association of America (100 Wood Avenue South, Iselin,
New Jersey 08830). Ancillary Bonds may also be eligible for SBA's
guarantee. A Performance Bond must not prohibit a Surety from
performing the Contract upon default of the Principal.
(c) Expiration of Bid Bond Guarantee. A Bid Bond guarantee expires
120 days after Execution of the Bid Bond, unless the Surety notifies
SBA in writing before the 120th day that a later expiration date is
required. The notification must include the new expiration date.
(d) Guarantee agreement. The terms and conditions of SBA's bond
guarantee agreements, including the guarantee percentage, may vary from
Surety to Surety, depending on past experience with SBA. If the
guarantee percentage is not fixed by the Investment Act, it is
determined by OSG after considering, among other things, the rating or
ranking assigned to the Surety by recognized authority, and the
Surety's Loss rate, average Contract amount, average bond penalty per
guaranteed bond, and ratio of Bid Bonds to Final Bonds, all in
comparison with other Sureties participating in the same SBA Surety
Bond Guarantee Program (Prior Approval or PSB) to a comparable degree.
Any guarantee agreement under this part is made exclusively for the
benefit of SBA and the Surety, and does not confer any rights (such as
a right of action against SBA) or benefits on any other party.
(e) Amount of Contract.--(1) Statutory ceiling. The amount of the
Contract to be bonded must not exceed $1,250,000 in face value at the
time of the bond's Execution.
(2) Aggregation of Contract amounts. The amounts of two or more
Contracts for a ``single project'' are aggregated to determine the
Contract amount unless the Contracts are to be performed in phases and
the prior bond is released before the beginning of each succeeding
phase. A bond may be considered released even if the warranty period it
is covering has not yet expired. For purposes of this paragraph, a
``single project'' means one represented by two or more Contracts of
one Principal or its Affiliates with one Obligee or its Affiliates for
performance at the same location, regardless of job title or nature of
the work to be performed.
(3) Service and supply contracts. A service or supply Contract
covering more than a 1 year period is eligible for an SBA guaranteed
bond if neither the annual Contract amount nor the penal sum of the
bond exceeds $1,250,000 at any time.
(f) Transfers or sales by Surety. Sureties must not sell or
otherwise transfer their files or accounts, whether before or after a
default by the Principal has occurred, without the prior written
approval of SBA. A violation of this provision is grounds for
termination from participation in the program. This provision does not
apply to the sale of an entire business division, subsidiary or
operation of the Surety.
Sec. 115.13 Eligibility of Principal.
(a) General eligibility. In order to be eligible for a bond
guaranteed by SBA, the Principal must comply with the following
requirements:
(1) Size. Together with its Affiliates, it must qualify as a small
business under part 121 of this title.
(2) Character. It must possess good character and reputation. A
Principal meets this standard if each owner of 20% or more of its
equity, and each of its officers, directors, or general partners,
possesses good character and reputation. A Person's good character and
reputation is presumed absent when:
(i) The Person is under indictment for, or has been convicted of a
felony, or a final civil judgment has been entered stating that such
Person has committed a breach of trust or has violated a law or
regulation protecting the integrity of business transactions or
business relationships; or
(ii) A regulatory authority has revoked, canceled, or suspended a
license of the Person which is necessary to perform the Contract; or
(iii) The Person has obtained a bond guarantee by fraud or material
misrepresentation (as described in Sec. 115.19(b)), or has failed to
keep the Surety informed of unbonded contracts or of a contract bonded
by another Surety, as required by a bonding line commitment under
Sec. 115.33.
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(3) Need for bond. It must certify that a bond is expressly
required by the bid solicitation or the original Contract in order to
bid on the Contract or to serve as a prime contractor or subcontractor.
(4) Availability of bond. It must certify that a bond is not
obtainable on reasonable terms and conditions without SBA's guarantee.
(5) Partial subcontract. It must certify the percentage of work
under the Contract to be subcontracted. SBA will not guarantee bonds
for Principals who are primarily brokers or who have effectively
transferred control over the project to one or more subcontractors.
(6) Debarment. It must certify that the Principal is not presently
debarred, suspended, proposed for debarment, declared ineligible, or
voluntarily excluded from transactions with any Federal department or
agency, under governmentwide debarment and suspension rules.
(b) Conflict of interest. A Principal is not eligible for an SBA-
guaranteed bond issued by a particular Surety if that Surety, or an
Affiliate of that Surety, or a close relative or member of the
household of that Surety or Affiliate owns, directly or indirectly, 10%
or more of the Principal. This prohibition also applies to ownership
interests in any of the Principal's Affiliates.
Sec. 115.14 Loss of Principal's eligibility for future assistance.
(a) Ineligibility. A Principal and its Affiliates lose eligibility
for further SBA bond guarantees if any of the following occurs under an
SBA-guaranteed bond issued on behalf of the Principal:
(1) Legal action under the guaranteed bond has been initiated.
(2) The Obligee has declared the Principal to be in default under
the Contract.
(3) The Surety has established a claim reserve for the bond of at
least $1000.
(4) The Surety has requested reimbursement for Losses incurred
under the bond.
(5) The guarantee fee has not been paid by the Principal.
(6) The Principal committed fraud or material misrepresentation in
obtaining the guaranteed bond.
(b) Reinstatement of Principal's eligibility. Prior Approval
Sureties should refer to Sec. 115.36(b) for provisions on reinstatement
of the Principal's eligibility. A PSB Surety may reinstate a
Principal's eligibility upon the Surety's determination that
reinstatement is appropriate.
Sec. 115.15 Underwriting and servicing standards.
(a) Underwriting. (1) Sureties must evaluate the credit, capacity,
and character of a Principal using standards generally accepted by the
surety industry and in accordance with SBA's Standard Operating
Procedures on underwriting and the Surety's principles and practices on
unguaranteed bonds. The Principal must satisfy the eligibility
requirements set forth in Sec. 115.13. The Surety must reasonably
expect that the Principal will successfully perform the Contract to be
bonded.
(2) The terms and conditions of the bond and the Contract must be
reasonable in light of the risks involved and the extent of the
Surety's participation. The bond must satisfy the eligibility
requirements set forth in Sec. 115.12(b). The Surety must be satisfied
as to the reasonableness of cost and the feasibility of successful
completion of the Contract.
(b) Servicing. The Surety must ensure that the Principal remains
viable and eligible for SBA's Surety Bond Guarantee Program, must
monitor the Principal's progress on bonded Contracts guaranteed by SBA,
and must request job status reports from Obligees of Final Bonds
guaranteed by SBA. Documentation of the job status requests must be
maintained by the Surety.
Sec. 115.16 Determination of Surety's Loss.
Loss is determined as follows:
(a) Loss under a Bid Bond is the lesser of the penal sum or the
amount which is the difference between the bonded bid and the next
higher responsive bid. In either case, the Loss is reduced by any
amounts the Surety recovers by reason of the Principal's defenses
against the Obligee's demand for performance by the Principal and any
sums the Surety recovers from indemnitors and other salvage.
(b) Loss under a Payment Bond is, at the Surety's option, the sum
necessary to pay all just and timely claims against the Principal for
the value of labor, materials, equipment and supplies furnished for use
in the performance of the bonded Contract and other covered debts, or
the penal sum of the Payment Bond. In either case, the Loss includes
interest (if any), but Loss is reduced by any amounts recovered
(through offset or otherwise) by reason of the Principal's claims
against laborers, materialmen, subcontractors, suppliers, or other
rightful claimants, and by any amounts recovered from indemnitors and
other salvage.
(c) Loss under a Performance Bond is, at the Surety's option, the
sum necessary to meet the cost of fulfilling the terms of a bonded
Contract or the penal sum of the bond. In either case, the Loss
includes interest (if any), but Loss is reduced by any amounts
recovered (through offset or otherwise) by reason of the Principal's
defenses or causes of action against the Obligee, and by any amounts
recovered from indemnitors and other salvage.
(d) Loss under an Ancillary Bond is the amount covered by such bond
which is attributable to the Contract for which guaranteed Final Bonds
were Executed.
(e) Loss includes the following expenses if they are itemized,
documented and attributable solely to the Loss under the guaranteed
bond:
(1) Amounts actually paid by the Surety which are specifically
allocable to the investigation, adjustment, negotiation, compromise,
settlement of, or resistance to a claim for Loss resulting from the
breach of the terms of the bonded Contract. Any cost allocation method
must be reasonable and must comply with generally accepted accounting
principles; and
(2) Amounts actually paid by the Surety for court costs and
reasonable attorney's fees incurred to mitigate any Loss under
paragraphs (a) through (e)(1) of this section including suits to obtain
sums due from Obligees, indemnitors, Principals and others.
(f) Loss does not include the following expenses:
(1) Any unallocated expenses, or any clear mark-up on expenses or
any overhead, of the Surety, its attorney, or any other party hired by
the Surety or the attorney;
(2) Expenses paid for any suits, cross-claims, or counterclaims
filed against the United States of America or any of its agencies,
officers, or employees unless the Surety has received, prior to filing
such suit or claim, written concurrence from SBA that the suit may be
filed;
(3) Attorney's fees and court costs incurred by the Surety in a
suit by or against SBA or its Administrator; and
(4) Fees, costs, or other payments, including tort damages, arising
from a successful tort suit or claim by a Principal or any other Person
against the Surety.
Sec. 115.17 Minimization of Surety's Loss.
(a) Indemnity agreements and collateral.--(1) Requirements. The
Surety must take all reasonable action to minimize risk of Loss
including, but not limited to, obtaining from each Principal a written
indemnity agreement which covers actual Losses under the Contract and
Imminent Breach payments under Sec. 115.34(a) or Sec. 115.69. The
indemnity agreement must be secured by such collateral as the Surety or
SBA finds appropriate. Indemnity
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agreements from other Persons, secured or unsecured, may also be
required by the Surety or SBA.
(2) Prohibitions. No indemnity agreement may be obtained from the
Surety, its agent or any other representative of the Surety. The Surety
must not separately collateralize the portion of its bond which is not
guaranteed by SBA.
(b) Salvage and recovery.--(1) General. The Surety must pursue all
possible sources of salvage and recovery. Salvage and recovery includes
all payments made in settlement of the Surety's claim, even though the
Surety has incurred other losses as a result of that Principal which
are not reimbursable by SBA.
(2) SBA's share. SBA is entitled to its guaranteed percentage of
all salvage and recovery from a defaulted Principal, its guarantors and
indemnitors, and any other party, received by the Surety in connection
with the guaranteed bond or any other bond issued by the Surety on
behalf of the Principal unless such recovery is unquestionably
identifiable as related solely to the non-guaranteed bond. The Surety
must reimburse or credit SBA (in the same proportion as SBA's share of
Loss) within 90 days of receipt of any recovery by the Surety.
(3) Multiple Sureties. In any dispute between two or more Sureties
concerning recovery under SBA guaranteed bonds, the dispute must first
be brought to the attention of OSG for an attempt at mediation and
settlement.
Sec. 115.18 Refusal to issue further guarantees; suspension and
termination of PSB status.
(a) Improper surety bond guarantee practices.--(1) Imprudent
practices. SBA may refuse to issue further guarantees to a Prior
Approval Surety or may suspend the preferred status of a PSB Surety, by
written notice stating all reasons for such decision and the effective
date. Reasons for such a decision include, but are not limited to, a
determination that the Surety (in its underwriting, its efforts to
minimize Loss, its claims or recovery practices, or its documentation
related to SBA guaranteed bonds) has failed to adhere to prudent
standards or practices, including any standards or practices required
by SBA, as compared to those of other Sureties participating in the
same SBA Surety Bond Guarantee Program to a comparable degree.
(2) Regulatory violations, fraud. Acts of wrongdoing such as fraud,
material misrepresentation, breach of the Prior Approval or PSB
Agreement, or regulatory violations (as defined in Secs. 115.19(d) and
115.19(h)) also constitute sufficient grounds for refusal to issue
further guarantees, or in the case of a PSB Surety, termination of
preferred status.
1(3) Audit; records. The failure of a Surety to consent to SBA's
audit or to maintain and produce records constitutes grounds for SBA to
refuse to issue further guarantees for a Prior Approval Surety, to
suspend a PSB Surety from participation, and to refuse to honor claims
submitted by a Prior Approval or PSB Surety until the Surety consents
to the audit.
(4) Excessive Losses. If a Surety experiences excessive Losses on
SBA guaranteed bonds relative to those of other Sureties participating
in the same SBA Surety Bond Guarantee Program to a comparable degree,
SBA may also require the renegotiation of the guarantee percentage and/
or SBA's charge to the Surety for bonds executed thereafter.
(b) Lack of business integrity. A Surety's participation in the
Surety Bond Guarantee Programs may be denied, suspended, or terminated
upon the occurrence of any event in paragraphs (b) (1) through (5) of
this section involving any of the following Persons: The Surety or any
of its officers, directors, partners, or other individuals holding at
least 20% of the Surety's voting securities, and any agents,
underwriters, or any individual empowered to act on behalf of any of
the preceding Persons.
(1) If a State or other authority has revoked, canceled, or
suspended the license required of such Person to engage in the surety
business, the right of such Person to participate in the SBA Surety
Bond Guarantee Program may be denied, terminated, or suspended, as
applicable, in that jurisdiction or in other jurisdictions.
Ineligibility or suspension from the Surety Bond Guarantee Programs is
for at least the duration of the license suspension.
(2) If such Person has been indicted or otherwise formally charged
with a misdemeanor or felony bearing on such Person's fitness to
participate in the Surety Bond Guarantee Programs, the participation of
such Person may be suspended pending disposition of the charge. Upon
conviction, participation may be denied or terminated.
(3) If a final civil judgment is entered holding that such Person
has committed a breach of trust or violation of a law or regulation
protecting the integrity of business transactions or relationships,
participation may be denied or terminated.
(4) If such Person has made a material misrepresentation or
willfully false statement in the presentation of oral or written
information to SBA in connection with an application for a surety bond
guarantee or the presentation of a claim, or committed a material
breach of the Prior Approval or PSB Agreement or a material violation
of the regulations (all as described in Sec. 115.19), participation may
be denied or terminated.
(5) If such Person is debarred, suspended, voluntarily excluded
from, or declared ineligible for participation in Federal programs,
participation may be denied or terminated.
(c) Notification requirement. The Prior Approval or PSB Surety must
promptly notify SBA of the occurrence of any event in paragraphs (b)
(1) through (5) of this section, or if any of the Persons described in
paragraph (b) of this section does not, or ceases to, qualify as a
Surety. SBA may require submission of a Statement of Personal History
(SBA Form 912) from any of these Persons.
(d) SBA proceedings. Decisions to suspend, terminate, deny
participation in, or deny reinstatement in the Surety Bond Guarantee
program are made by the AA/SG. A Surety may file a petition for review
of suspensions and terminations with the SBA Office of Hearings and
Appeals (OHA) under part 134 of this chapter. SBA's Administrator may,
pending a decision pursuant to Part 134 of this chapter, suspend the
participation of any Surety for any of the causes listed in paragraphs
(b) (1) through (5) of this section.
(e) Effect on guarantee. A guarantee issued by SBA before a
suspension or termination under this section remains in effect, subject
to SBA's right to deny liability under the guarantee.
Sec. 115.19 Denial of liability.
In addition to equitable and legal defenses and remedies under
contract law, the Act and the regulations in this part, SBA is not
liable under a Prior Approval or PSB Agreement if any of the
circumstances in paragraphs (a) through (h) of this section exist.
(a) Excess Contract or bond amount. The total Contract amount at
the time of Execution of the bond exceeds $1,250,000 in face value (see
Sec. 115.12(e)), or the bond amount at any time exceeds the total
Contract amount.
(b) Misrepresentation or fraud. The Surety obtained the Prior
Approval or PSB Agreement, or applied for reimbursement for losses, by
fraud or material misrepresentation. Material misrepresentation
includes (but is not limited to) both the making of an untrue statement
of material fact and the omission of a statement of material fact
necessary to make a statement not
[[Page 3275]]
misleading in light of the circumstances in which it was made. Material
misrepresentation also includes the adoption by the Surety of a
material misstatement made by others which the Surety knew or under
generally accepted underwriting standards should have known to be false
or misleading. The Surety's failure to disclose its ownership (or the
ownership by any owner of at least 20% of the Surety's equity) of an
interest in a Principal or an Obligee is considered the omission of a
statement of material fact.
(c) Material breach. The Surety has committed a material breach of
one or more terms or conditions of its Prior Approval or PSB Agreement.
A material breach is considered to have occurred if:
(1) Such breach (or such breaches in the aggregate) causes an
increase in the Contract amount or in the bond amount of at least 25%
or $50,000; or
(2) One of the conditions under Part B of Title IV of the
Investment Act is not met.
(d) Substantial regulatory violation. The Surety has committed a
``substantial violation'' of SBA regulations. For purposes of this
paragraph, a ``substantial violation'' is a violation which causes an
increase in the bond amount of at least 25% or $50,000 in the
aggregate, or is contrary to the purposes of the Surety Bond Guarantee
Programs.
(e) Alteration. Without obtaining prior written approval from SBA
(which may be conditioned upon payment of additional fees), the Surety
agrees to or acquiesces in any material alteration in the terms,
conditions, or provisions of the bond, including but not limited to the
following acts:
(1) Naming as an Obligee or co-Obligee any Person that does not
qualify as an Obligee under Sec. 115.10; or
(2) In the case of a Prior Approval Surety, acquiescing in any
alteration to the bond which would increase the bond amount by at least
25% or $50,000.
(f) Timeliness. (1) Either:
(i) The bond was Executed prior to the date of SBA's guarantee; or
(ii) The bond was Executed (or approved, if the Surety is legally
bound by such approval) after the work under the Contract had begun,
unless SBA executes a ``Surety Bond Guarantee Agreement Addendum'' (SBA
Form 991) after receiving all of the following from the Surety:
(A) Satisfactory evidence, including a certified copy of the
Contract (or a sworn affidavit from the Principal), showing that the
bond requirement was contained in the original Contract, or other
documentation satisfactory to SBA, showing why a bond was not
previously obtained and is now being required;
(B) Certification by the Principal that all taxes and labor costs
are current, and listing all suppliers and subcontractors, indicating
that they are all paid to date, and attaching a waiver of lien from
each; or an explanation satisfactory to SBA why such documentation
cannot be produced; and
(C) Certification by the Obligee that all payments due under the
Contract to date have been made and that the job has been
satisfactorily completed to date.
(2)(i) For purposes of paragraph (f)(1)(ii) of this section, work
under a Contract is considered to have begun when a Principal takes any
action at the job site which would have exposed its Surety to liability
under applicable law had a bond been Executed (or approved, if the
Surety is legally bound by such approval) at the time.
(ii) For purposes of this paragraph (f), the Surety must maintain a
contemporaneous record of the Execution and approval of each bond.
(g) Principal fee. The Surety has not remitted to SBA the
Principal's payment for the full amount of the guarantee fee within the
time period required under Sec. 115.30(d) for Prior Approval Sureties
or Sec. 115.66 for PSB Sureties. SBA may reinstate the guarantee upon a
showing that the Contract is not in default and that a valid reason
exists why a timely submission was not made.
(h) Other regulatory violations. The occurrence of any of the
following:
(1) The Principal on the bonded Contract is not a small business;
(2) The bond was not required under the bid solicitation or the
original Contract;
(3) The bond was not eligible for guarantee by SBA because the
bonded contract was not a Contract as defined in Sec. 115.10;
(4) The loss occurred under a bond that was not guaranteed by SBA;
(5) The loss incurred by the Surety was not a Loss as determined
under Sec. 115.16; or
(6) The Surety's loss under a Performance Bond did not result from
the Principal's breach or Imminent Breach of the Contract.
Sec. 115.20 Insolvency of Surety.
(a) Successor in interest. If a Surety becomes insolvent, all
rights or benefits conferred on the Surety under a valid and binding
Prior Approval or PSB Agreement will accrue only to the trustee or
receiver of the Surety. SBA will not be liable to the trustee or
receiver of the insolvent Surety except for the guaranteed portion of
any Loss incurred and actually paid by such Surety or its trustee or
receiver under the guaranteed bonds.
(b) Filing requirement. The trustee or receiver must submit to SBA
quarterly status reports accounting for all funds received and all
settlements being considered.
Sec. 115.21 Audits and investigations.
(a) Audits.--(1) Scope of audit. SBA may audit in the office of a
Prior Approval or PSB Surety, the Surety's attorneys or consultants, or
the Principal or its subcontractors, all documents, files, books,
records, tapes, disks and other material relevant to SBA's guarantee,
commitments to guarantee a surety bond, or agreements to indemnify the
Prior Approval or PSB Surety. See Sec. 115.18(a)(3) for consequences of
failure to comply with this section.
(2) Frequency of PSB audits. Each PSB Surety is subject to audit at
least once each year by examiners selected and approved by SBA.
(b) Records. The Surety must maintain the records listed in this
paragraph (b) for the term of each bond, plus any additional time
required to settle any claims of the Surety for reimbursement from SBA
and to attempt salvage or other recovery, plus an additional 3 years.
If there are any unresolved audit findings in relation to a particular
bond, the Surety must maintain the related records until the findings
are resolved. The records to be maintained include the following:
(1) A copy of the bond;
(2) A copy of the bonded Contract;
(3) All documentation submitted by the Principal in applying for
the bond;
(4) All information gathered by the Surety in reviewing the
Principal's application;
(5) All documentation of any of the events set forth in
Sec. 115.35(a) or Sec. 115.65(c)(2);
(6) All records of any transaction for which the Surety makes
payment under or in connection with the bond, including but not limited
to claims, bills (including lawyers' and consultants' bills),
judgments, settlement agreements and court or arbitration decisions,
consultants' reports, Contracts and receipts;
(7) All documentation relating to efforts to mitigate Losses,
including documentation required by Sec. 115.34(a) or Sec. 115.69
concerning Imminent Breach;
(8) All records of any accounts into which fees and funds obtained
in mitigation of Losses were paid and from which payments were made
under the
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bond, and any other trust accounts, and any reconciliations of such
accounts;
(9) Job status reports received from Obligees and documentation of
each unanswered request for a job status report; and
(10) All documentation relating to any collateral held by or
available to the Surety.
(c) Purpose of audit. SBA's audit will determine, but not be
limited to:
(1) The adequacy and sufficiency of the Surety's underwriting and
credit analysis, its documentation of claims and claims settlement
procedures and activities, and its recovery procedures and practices;
(2) The Surety's minimization of Loss, including the exercise of
bond options upon Contract default; and
(3) The Surety's loss ratio in comparison with other Sureties
participating in the same SBA Surety Bond Guarantee Program to a
comparable degree.
(d) Investigations. SBA may conduct investigations to inquire into
the possible violation by any Person of the Small Business Act or the
Investment Act, or of any rule or regulation under those Acts, or of
any order issued under those Acts, or of any Federal law relating to
programs and operations of SBA.
Subpart B--Guarantees Subject to Prior Approval
Sec. 115.30 Submission of Surety's guarantee application.
(a) Legal effect of application. By submitting an application to
SBA for a bond guarantee, the Prior Approval Surety certifies that the
Principal meets the eligibility requirements set forth in Sec. 115.13
and that the underwriting standards set forth in Sec. 115.15 have been
met.
(b) SBA's determination. SBA's approval or decline of a guarantee
application is made in writing by an authorized SBA officer. The
officer may provide telephone notice before the Prior Approval Surety
receives SBA's guarantee approval form if the officer has already
signed the form. In the event of a conflict between the telephone
notice and the written form, the written form controls.
(c) Reconsideration-appeal of SBA determination. A Prior Approval
Surety may request reconsideration of a decline from the SBA officer
who made the decision. If the decision on reconsideration is negative,
the Surety may appeal to an individual designated by the AA/SG. If the
decision is again adverse, the Surety may appeal to the AA/SG, who will
make the final decision.
(d) Notice and payment to SBA. When the Surety has Executed a Final
Bond, including a Final Bond under a bonding line, the Surety must
complete the Prior Approval Agreement, and submit the form, together
with the Principal's payment for its guarantee fee (see Sec. 115.32(b))
to SBA within 45 days, or in the case of a bonding line, within 15
business days (see Sec. 115.33(d)(2)) after Execution of the bond.
Sec. 115.31 Guarantee percentage.
(a) Ninety percent. SBA reimburses a Prior Approval Surety for 90%
of the Loss incurred and paid if:
(1) The total amount of the Contract at the time of Execution of
the bond is $100,000 or less; or
(2) The bond was issued on behalf of a small business owned and
controlled by socially and economically disadvantaged individuals. See
part 124 of this chapter for applicable definitions and criteria.
(b) Eighty percent. SBA reimburses a Prior Approval Surety in an
amount not to exceed 80% of the Loss incurred and paid on bonds for
Contracts in excess of $100,000 which are executed on behalf of non-
disadvantaged concerns.
(c) Contract increase to over $100,000. If the Contract amount
increases to more than $100,000 after Execution of the bond, the
guarantee percentage decreases by one percentage point for each $5,000
of increase or part thereof, but it does not decrease below 80%. This
provision applies only to guarantees which qualify under paragraph
(a)(1) of this section.
(d) Contract increase to over $1,250,000. If the Contract amount
increases above the statutory limit of $1,250,000 after Execution of
the bond, SBA's share of the Loss is limited to that percentage of the
increased Contract amount which the statutory limit represents,
multiplied by the guarantee percentage approved by SBA. For example, if
a Contract amount increases to $1,375,000, SBA's share of the Loss
under an 80% guarantee is limited to 72.73% [1,250,000 /
1,375,000=
FR Doc. 96-1347 Surety Bond Guarantee
90.91% x 80%=72.73%].
(e) Contract decrease to $100,000 or less. If the Contract amount
decreases to $100,000 or less after Execution of the bond, SBA's
guarantee percentage increases to 90% if the Surety provides SBA with
evidence supporting the decrease and any other information or documents
requested.
Sec. 115.32 Fees and Premiums.
(a) Surety's Premium. A Prior Approval Surety must not charge a
Principal an amount greater than that authorized by the appropriate
insurance department. The Surety must not require the Principal to
purchase casualty or other insurance or any other services from the
Surety or any Affiliate or agent of the Surety. The Surety must not
charge non-Premium fees to a Principal unless the Surety performs other
services for the Principal, the additional fee is permitted by State
law, and the Principal agrees to the fee.
(b) SBA charge to Principal. SBA does not charge Principals
application or Bid Bond guarantee fees. If SBA guarantees a Final Bond,
the Principal must pay a guarantee fee equal to a certain percentage of
the Contract amount. The percentage is determined by SBA and is
published in Notices in the Federal Register from time to time. The
Principal's fee is rounded to the nearest dollar and is to be remitted
to SBA by the Surety together with the form required under
Sec. 115.30(d). See paragraph (d) of this section for additional
requirements when the Contract amount changes.
(c) SBA charge to Surety. SBA does not charge Sureties application
or Bid Bond guarantee fees. Subject to Sec. 115.18(a)(4), the Surety
must pay SBA a guarantee fee on each guaranteed bond (other than a Bid
Bond) in the ordinary course of business. The fee is a certain
percentage of the bond Premium, determined by SBA and published in
Notices in the Federal Register from time to time. The fee is rounded
to the nearest dollar. SBA does not receive any portion of a Surety's
non-Premium charges. See paragraph (d) of this section for additional
requirements when the bond amount or the Contract amount changes.
(d) Contract or bond increases/decreases.--(1) Notification and
approval. The Prior Approval Surety must notify SBA of any increases or
decreases in the Contract or bond amount that aggregate 25% or $50,000,
as soon as the Surety acquires knowledge of the change. Whenever the
original bond amount increases as a result of a single change order of
at least 25% or $50,000, the prior written approval of such increase by
SBA is required on a supplemental Prior Approval Agreement
(Supplemental Form 990) and is conditioned upon payment by the Surety
of the increase in the Principal's guarantee fee as set forth in
paragraph (d)(2) of this section.
(2) Increases; fees. Notification of increases in the Contract or
bond amount under this paragraph (d) must be accompanied by payment of
the increase in the Principal's guarantee fee computed on the increase
in the Contract amount. If the increase in the Principal's fee is less
than $40, such
[[Page 3277]]
increase is not due until all unpaid increases in the Principal's fee
aggregate at least $40. The Surety's check for payment of the increase
in the Surety's guarantee fee, computed on the increase in the bond
Premium, may be submitted in the ordinary course of business. Increases
in the Surety's fee are not due until they aggregate at least $40.
(3) Decreases; refunds. Whenever SBA is notified of a decrease in
the Contract or bond amount, SBA will refund to the Principal a
proportionate amount of the Principal's guarantee fee and rebate to the
Surety a proportionate amount of SBA's Premium share in the ordinary
course of business. If the amount to be refunded or rebated is less
than $40, such refund or rebate will not be made until the amounts to
be refunded or rebated, respectively, aggregate at least $40. Upon
receipt of the refund, the Surety must promptly pay a proportionate
amount of its Premium to the Principal.
Sec. 115.33 Surety bonding line.
A surety bonding line is a written commitment by SBA to a Prior
Approval Surety which provides for the Surety's Execution of multiple
bonds for a specified small business strictly within pre-approved
terms, conditions and limitations. In applying for a bonding line, the
Surety must provide SBA with information on the applicant as requested.
In addition to the other limitations and provisions set forth in this
part 115, the following conditions apply to each surety bonding line:
(a) Underwriting. A bonding line may be issued by SBA for a
Principal only if the underwriting evaluation is satisfactory. The
Prior Approval Surety must require the Principal to keep it informed of
all its contracts, whether bonded by the same or another surety or
unbonded, during the term of the bonding line.
(b) Bonding line conditions. The bonding line contains limitations
on the following:
(1) The term of the bonding line, not to exceed 1 year subject to
renewal in writing;
(2) The total dollar amount of the Principal's bonded and unbonded
work on hand at any time, including outstanding bids, during the term
of the bonding line;
(3) The number of such bonded and unbonded contracts outstanding at
any time during the term of the bonding line;
(4) The maximum dollar amount of any single guaranteed bonded
Contract;
(5) The timing of Execution of bonds under the bonding line--bonds
must be dated and Executed before the work on the underlying Contract
has begun, or the Surety must submit to SBA the documentation required
under Sec. 115.19(f)(1)(ii); and
(6) Any other limitation related to type, specialty of work,
geographical area, or credit.
(c) Excess bonding. If, after a bonding line is issued, the
Principal desires a bond and the Surety desires a guarantee exceeding a
limitation of the bonding line, the Surety must submit an application
to SBA under regular procedures.
(d) Submission of forms to SBA.--(1) Bid Bonds. Within 15 business
days after the Execution of any Bid Bonds under a bonding line, the
Surety must submit a ``Surety Bond Guarantee Underwriting Review'' (SBA
Form 994B) to SBA for approval. If that form is already on file with
SBA and no new financial statements are required or have been received
from the Principal, a ``Surety Bond Guarantee Review Update'' (SBA Form
994C) may be submitted instead. If the Surety fails to submit either
form within this time period, SBA's guarantee of the bond will be void
from its inception unless SBA determines otherwise upon a showing that
a valid reason exists why the timely submission was not made.
(2) Final Bonds. Within 15 business days after the Execution of any
Final Bonds under a bonding line, the Surety must submit a signed Prior
Approval Agreement and a ``Surety Bond Guarantee Underwriting Review''
(SBA Form 994B) to SBA for approval. If that form is already on file
with SBA and no new financial statements are required or have been
received from the Principal, a ``Surety Bond Guarantee Review Update''
(SBA Form 994C) may be submitted instead. If the Surety fails to submit
these forms together with the Principal's payment for its guarantee fee
within this time period, SBA's guarantee of the bond will be void from
its inception unless SBA determines otherwise upon a showing that the
Contract is not in default and a valid reason exists why the timely
submission was not made.
(3) Additional information. The Surety must submit any other data
SBA requests.
(e) Cancellation of bonding line.--(1) Optional cancellation.
Either SBA or the Surety may cancel a bonding line at any time, with or
without cause, upon written notice to the other party. Upon the receipt
of any adverse information concerning the Principal, the Surety must
promptly notify SBA, and SBA may cancel the bonding line.
(2) Mandatory cancellation. Upon the occurrence of a default by the
Principal, whether under a contract bonded by the same or another
surety or an unbonded contract, the Surety must immediately cancel the
bonding line.
(3) Effect of cancellation. Cancellation of a bonding line by SBA
is effective upon receipt of written notice by the Surety. Bonds issued
before the effective date of cancellation remain guaranteed by SBA.
Upon cancellation by SBA or the Surety, the Surety must promptly notify
the Principal in writing.
Sec. 115.34 Minimization of Surety's Loss.
(a) Imminent Breach.--(1) Prior approval requirement. SBA will
reimburse its guaranteed share of payments made by a Surety to avoid or
attempt to avoid an Imminent Breach of the terms of a Contract covered
by an SBA guaranteed bond only if the payments were made with the prior
approval of OSG. OSG's prior approval will be given only if the Surety
demonstrates to SBA's satisfaction that a breach is imminent and that
there is no other recourse to prevent such breach.
(2) Amount of reimbursement. The aggregate of the payments by SBA
to avoid Imminent Breach cannot exceed 10% of the Contract amount,
unless the Administrator finds that a greater payment (not to exceed
the guaranteed share of the bond penalty) is necessary and reasonable.
In no event will SBA make any duplicate payment pursuant to this or any
other provision of this part 115.
(3) Recordkeeping requirement. The Surety must keep records of
payments made to avoid Imminent Breach.
(b) Salvage and recovery. A Prior Approval Surety must pursue all
possible sources of salvage and recovery until SBA concurs with the
Surety's recommendation for a discontinuance or for a settlement. The
Surety must certify that continued pursuit of salvage and recovery
would be neither economically feasible nor a viable strategy in
maximizing recovery. See also Sec. 115.17(b).
Sec. 115.35 Claims for reimbursement of Losses.
(a) Notification requirements.--(1) Events requiring notification.
A Prior Approval Surety must notify OSG of the occurrence of any of the
following:
(i) Legal action under the bond has been initiated.
(ii) The Obligee has declared the Principal to be in default under
the Contract.
(iii) The Surety has established a claim reserve for the bond.
(iv) The Surety has received any adverse information concerning the
[[Page 3278]]
Principal's financial condition or possible inability to complete the
project or to pay laborers or suppliers.
(2) Timing of notification. Notification must be made in writing at
the earlier of the time the Surety applies for a guarantee on behalf of
an affected Principal, or within 30 days of the date the Surety
acquires knowledge, or should have acquired knowledge, of any of the
listed events.
(b) Surety action. The Surety must take all necessary steps to
mitigate Losses resulting from any of the events in paragraph (a) of
this section, including the disposal at fair market value of any
collateral held by or available to the Surety. Unless SBA notifies the
Surety otherwise, the Surety must take charge of all claims or suits
arising from a defaulted bond, and compromise, settle and defend such
suits. The Surety must handle and process all claims under the bond and
all settlements and recoveries as it does on non-guaranteed bonds.
(c) Claim reimbursement requests. (1) Claims for reimbursement for
Losses which the Surety has paid must be submitted (together with a
copy of the bond, the bonded Contract, and any indemnity agreements)
with the initial claim to OSG on a ``Default Report, Claim for
Reimbursement and Record of Administrative Action'' (SBA Form 994H),
within 1 year from the time of each disbursement. Claims submitted
after 1 year must be accompanied by substantiation satisfactory to SBA.
The date of the claim for reimbursement is the date of receipt of the
claim by SBA, or such later date as additional information requested by
SBA is received.
(2) The Surety must also submit evidence of the disposal of all
collateral at fair market value.
(3) SBA may request additional information prior to reimbursing the
Surety for its Loss.
(4) Subject to the offset provisions of part 140, SBA pays its
share of the Loss incurred and paid by the Surety within 90 days of
receipt of the requisite information.
(5) Claims for reimbursement and any additional information
submitted are subject to review and audit by SBA, including but not
limited to the Surety's compliance with SBA's regulations and forms.
(d) Status updates. The Surety must submit semiannual status
reports on each claim 6 months after the initial default notice, and
then every 6 months. The Surety must notify SBA immediately of any
substantial changes in the status of the claim or the amounts of Loss
reserves.
(e) Reservation of SBA rights. The payment by SBA of a Surety's
claim does not waive or invalidate any of the terms of the Prior
Approval Agreement, the regulations set forth in this part 115, or any
defense SBA may have against the Surety. Within 30 days of receipt of
notification that a claim or any portion of a claim should not have
been paid by SBA, the Surety must repay the specified amounts to SBA.
Sec. 115.36 Indemnity settlements and reinstatement of Principal.
(a) Indemnity settlements. (1) An indemnity settlement occurs when
a defaulted Principal and its Surety agree upon an amount, less than
the actual loss under the bond, which will satisfy the Principal's
indebtedness to the Surety. Sureties must not agree to any indemnity
settlement proposal or enter into any such agreement without SBA's
concurrence.
(2) Any settlement proposal submitted for SBA's consideration must
include current financial information, including financial statements,
tax returns, and credit reports, together with the Surety's written
recommendations. It should also indicate whether the Principal is
interested in further bonding.
(3) The Surety must pay SBA its pro rata share of the settlement
amount within 90 days of receipt. Prior to closing the file on a
Principal, the Surety must certify that SBA has received its pro rata
share of all indemnity recovery.
(b) Conditions for reinstatement. At any time after a Principal
becomes ineligible for further bond guarantees under Sec. 115.14(a),
the Surety may recommend that such Principal's eligibility be
reinstated. OSG may agree to reinstate the Principal and its Affiliates
if:
(1) The Principal's guarantee fee has been paid to SBA and SBA
receives evidence that the Principal has paid all delinquent amounts
due to the Surety (including amounts for Imminent Breach); or
(2) The Surety has settled its claim with the Principal for an
amount and on terms accepted by OSG; or
(3) The Principal contests a claim and provides collateral,
acceptable to the Surety and OSG, which has a liquidation value of at
least the amount of the claim including related expenses; or
(4) The Principal's indebtedness to the Surety is discharged by
operation of law (e.g., bankruptcy discharge); or
(5) OSG and the Surety determine that further bond guarantees are
appropriate.
(c) Underwriting after reinstatement. A guarantee application
submitted after reinstatement of the Principal's eligibility is subject
to a very stringent underwriting review.
Subpart C--Preferred Surety Bond (PSB) Guarantees
Sec. 115.60 Selection and admission of PSB sureties.
(a) Selection of PSB Sureties. SBA's selection of PSB Sureties will
be guided by, but not limited to, these factors:
(1) An underwriting limitation of at least $1,250,000 on the U.S.
Treasury Department list of acceptable sureties;
(2) An agreement to charge Principals no more than the Surety
Association of America's advisory premium rates in effect on August 1,
1987;
(3) Premium income from contract bonds guaranteed by any government
agency (Federal, State or local) of no more than one- quarter of the
total contract bond premium income of the Surety;
(4) The vesting of underwriting authority for SBA guaranteed bonds
only in employees of the Surety;
(5) The vesting of final settlement authority for claims and
recovery under the PSB program only in employees of the Surety's
permanent claims department; and
(6) The rating or ranking designations assigned to the Surety by
recognized authority.
(b) Admission of PSB Sureties. A Surety admitted to the PSB program
must execute a PSB Agreement before approving SBA guaranteed bonds. No
SBA guarantee attaches to bonds approved before the AA/SG or designee
has countersigned the Agreement.
Sec. 115.61 Duration of PSB program.
The PSB program terminates on September 30, 1997, unless extended
by legislation. SBA guarantees effective under this program on or
before September 30, 1997, will remain in effect after such date.
Sec. 115.62 Prohibition on participation in Prior Approval program.
Neither a PSB Surety nor any of its Affiliates is eligible to
submit applications under subpart B of this part.
Sec. 115.63 Allotment of guarantee authority.
(a) General. SBA allots to each PSB Surety a periodic maximum
guarantee authority. No SBA guarantee attaches to bonds approved by a
PSB Surety if the bonds exceed the allotted authority for the period in
which the bonds are approved. No reliance on future authority is
permitted. An allotment can be increased only by prior written
permission of SBA.
[[Page 3279]]
(b) Execution of Bid Bonds. When the PSB Surety Executes a Bid
Bond, SBA debits the Surety's allotment for an amount equal to the
guarantee percentage of the estimated penal sum of the Final Bond SBA
would guarantee if the Contract were awarded. If the Contract is then
awarded for an amount other than the bid amount, or if the bid is
withdrawn or the Bid Bond guarantee has expired (see Sec. 115.12(c)),
SBA debits or credits the Surety's allotment accordingly.
(c) Execution of Final Bonds. If the PSB Surety Executes a
guaranteed Final Bond, but not the related Bid Bond, SBA debits the
Surety's allotment for an amount equal to the guarantee percentage of
the penal sum of the Final Bond. SBA will debit the allotment for
increases, and credit the allotment for decreases, in the bond amount.
(d) Release and non-issuance of Final Bonds. The release of Final
Bonds upon completion of the Contract does not restore the
corresponding allotment. If, however, a PSB Surety approves a Final
Bond but never issues the bond, SBA will credit the Surety's allotment
for an amount equal to the guarantee percentage of the penal sum of the
bond. In that event, the Surety must notify SBA as soon as possible,
but in no event later than 5 business days after the non-issuance has
been determined. Until the Surety has so notified SBA, it cannot rely
on such credit.
Sec. 115.64 Timeliness requirement.
There must be no Execution or approval of a bond by a PSB Surety
after commencement of work under a Contract unless the Surety obtains
written approval from the AA/SG. To apply for such approval, the Surety
must submit a completed ``Surety Bond Guarantee Agreement Addendum''
(SBA Form 991), together with the evidence and certifications described
in Sec. 115.19(f)(1)(ii).
Sec. 115.65 General PSB procedures.
(a) Retention of information. A PSB Surety must comply with all
applicable SBA regulations and obtain from its applicants all the
information and certifications required by SBA. The PSB Surety must
document compliance with SBA regulations and retain such certifications
in its files, including a contemporaneous record of the date of
approval and Execution of each bond. See also Sec. 115.19(f). The
certifications and other information must be made available for
inspection by SBA or its agents and must be available for submission to
SBA in connection with the Surety's claims for reimbursement. The PSB
Surety must retain the certifications and other information for the
term of the bond, plus such additional time as may be required to
settle any claims of the Surety for reimbursement from SBA and to
attempt salvage or other recovery, plus an additional 3 years. If there
are any unresolved audit findings in relation to a particular bond, the
Surety must maintain the related certifications and other information
until the findings are resolved.
(b) Usual staff and procedures. The approval, Execution and
administration by a PSB Surety of SBA guaranteed bonds must be handled
in the same manner and with the same staff as the Surety's activity
outside the PSB program. The Surety must request job status reports
from Obligees in accordance with its own procedures.
(c) Notification to SBA. (1) Approvals. A PSB Surety must notify
SBA by electronic transmission or monthly bordereau, as agreed between
the Surety and SBA, of all approved Bid and Final Bonds, and of the
Surety's approval of increases and decreases in the Contract or bond
amount. The notice must contain the information specified from time to
time in agreements between the Surety and SBA. SBA may deny liability
with respect to Final Bonds for which SBA has not received timely
notice.
(2) Other events requiring notification. The PSB Surety must notify
SBA within 30 calendar days of the name and address of any Principal
against whom legal action on the bond has been instituted; whenever an
Obligee has declared a default; whenever the Surety has established or
added to a claim reserve; of the recovery of any amounts on the
guaranteed bond; and of any decision by the Surety to bond any such
Principal again.
Sec. 115.66 Fees.
The PSB Surety must pay SBA a certain percentage of the Premium it
charges on Final Bonds. The PSB Surety must also remit to SBA the
Principal's payment for its guarantee fee, equal to a certain
percentage of the Contract amount. The fee percentages are determined
by SBA and are published in Notices in the Federal Register from time
to time. Each fee is rounded to the nearest dollar. The Surety must
remit SBA's Premium share and the Principal's guarantee fee with the
bordereau listing the related Final Bond, as required in the PSB
Agreement.
Sec. 115.67 Changes in Contract or bond amount.
(a) Increases. The PSB Surety must process Contract or bond amount
increases within its allotment in the same manner as initial guaranteed
bond issuances (see Sec. 115.65(c)(1)). The Surety must present checks
for additional fees due from the Principal and the Surety on increases
aggregating 25% of the contract or bond amount or $50,000, and attach
such payments to the respective monthly bordereau. If the additional
Principal's fee or Surety's fee is less than $40, such fee is not due
until all unpaid increases in such fee aggregate at least $40.
(b) Decreases. If the Contract or bond amount is decreased, SBA
will refund to the Principal a proportionate amount of the guarantee
fee, and adjust SBA's Premium share accordingly in the ordinary course
of business. No refund or adjustment will be made until the amounts to
be refunded or rebated, respectively, aggregate at least $40.
Sec. 115.68 Guarantee percentage.
SBA reimburses a PSB Surety in an amount not to exceed 70% of the
Loss incurred and paid. Where the Contract amount, after the Execution
of the bond, increases beyond the statutory limit of $1,250,000, SBA's
share of the Loss is limited to that percentage of the increased
Contract amount which the statutory limit represents, multiplied by the
guarantee percentage approved by SBA. For an example, see
Sec. 115.31(d).
Sec. 115.69 Imminent Breach.
(a) No prior approval requirement. SBA will reimburse a PSB Surety
for the guaranteed portion of payments the Surety makes to avoid or
attempt to avoid an Imminent Breach of the terms of a Contract covered
by an SBA guaranteed bond. The PSB Surety does not need SBA approval to
make Imminent Breach payments.
(b) Amount of reimbursement. The aggregate of the payments by SBA
under this section cannot exceed 10% of the Contract amount, unless the
Administrator finds that a greater payment (not to exceed the
guaranteed portion of the bond penalty) is necessary and reasonable. In
no event will SBA make any duplicate payment under any provision of
these regulations in this part.
(c) Recordkeeping requirement. The PSB Surety must keep records of
payments made to avoid Imminent Breach.
Sec. 115.70 Claims for reimbursement of Losses.
(a) How claims are submitted. A PSB Surety must submit claims for
reimbursement on a form approved by SBA no later than 1 year from the
date the Surety paid the amount. Loss is determined as of the date of
receipt by
[[Page 3280]]
SBA of the claim for reimbursement, or as of such later date as
additional information requested by SBA is received. Subject to the
offset provisions of part 140, SBA pays its share of Loss within 90
days of receipt of the requisite information. Claims for reimbursement
and any additional information submitted are subject to review and
audit by SBA.
(b) Surety responsibilities. The PSB Surety must take all necessary
steps to mitigate Losses when legal action against a bond has been
instituted, when the Obligee has declared a default, and when the
Surety has established a claim reserve. The Surety may dispose of
collateral at fair market value only. Unless SBA notifies the Surety
otherwise, the Surety must take charge of all claims or suits arising
from a defaulted bond, and compromise, settle or defend the suits. The
Surety must handle and process all claims under the bond and all
settlements and recoveries in the same manner as it does on non-
guaranteed bonds.
(c) Reservation of SBA's rights. The payment by SBA of a PSB
Surety's claim does not waive or invalidate any of the terms of the PSB
Agreement, the regulations in this part 115, or any defense SBA may
have against the Surety. Within 30 days of receipt of notification that
a claim or any portion of a claim should not have been paid by SBA, the
Surety must repay the specified amounts to SBA.
Sec. 115.71 Denial of liability.
In addition to the grounds set forth in Sec. 115.19, SBA may deny
liability to a PSB Surety if:
(a) The PSB Surety's guaranteed bond was in an amount which,
together with all other guaranteed bonds, exceeded the allotment for
the period during which the bond was approved, and no prior SBA
approval had been obtained;
(b) The PSB Surety's loss was incurred under a bond which was not
listed on the bordereau for the period when it was approved; or
(c) The loss incurred by the PSB Surety is not attributable to the
particular Contract for which an SBA guaranteed bond was approved.
Dated: January 22, 1996.
John T. Spotila,
Acting Administrator.
[FR Doc. 96-1347 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P
Complete official Federal Register PDF
FR Doc. 96-1162 Disaster Loan Program
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3304-3310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1162]
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 123
Disaster Loan Program
AGENCY: Small Business Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: In response to President Clinton's regulatory review
directive, the Small Business Administration has completed a page-by-
page and line-by-line review of its regulations. As a result, SBA is
clarifying and streamlining its regulations. This final rule
reorganizes the entire Part 123 covering the disaster loan program to
make it clearer and easier to use.
EFFECTIVE DATE: This rule is effective on March 1, 1996.
FOR FURTHER INFORMATION CONTACT: Bernard Kulik, Associate Administrator
for Disaster Assistance, at (202) 205-6734.
SUPPLEMENTARY INFORMATION: Part 123 of Chapter I, 13 CFR contains
policies governing the eligibility of disaster victims to obtain low-
cost loans to restore their damaged property to its pre-disaster
condition. On November 24, 1995, SBA published a proposed rule in the
Federal Register (60 FR 58014) to reorganize the entire Part 123 to
make it clearer and easier to use. SBA did not receive any comments in
response to the proposed rule. Thus, SBA is finalizing that rule
without any material changes. The rule eliminates references to
disasters which occurred years ago, and it would eliminate Subpart D--
Persian Gulf Troop Deployment Economic Injury Loans because the
authority for that loan program has expired. A conversion table
follows:
------------------------------------------------------------------------
Existing section Action New section
------------------------------------------------------------------------
123.1................ Revise............... 123.1
123.2................ Revise............... 123.101
123.3................ Revise............... 123.3, 123.4, 123.5,
123.10, 123.101
123.4................ Revise............... 123.5
123.5................ Delete............... ..........................
123.6................ Revise............... 123.8
123.7................ Revise............... 123.3
123.8................ Delete............... ..........................
123.9................ Revise............... 123.101, 123.104, 123.105
123.10............... Delete............... ..........................
123.11............... Revise............... 123.11
123.12............... Revise............... 123.13
123.13............... Revise............... 123.16, 123.104
123.14............... Revise............... 123.101
123.15............... Delete............... ..........................
123.16............... Delete............... ..........................
123.17............... Revise............... 123.201
123.18............... Revise............... 123.12
123.19............... Revise............... 123.9
123.20............... Delete............... ..........................
123.21............... Revise............... 123.100, 123.200
123.22............... Revise............... 123.3
123.23............... Revise............... 123.3
123.24............... Revise............... 123.6, 123.7, 123.12,
123.101, 123.105,
123.106, 123.107,
123.201, 123.202
123.25............... Revise............... 123.15, 123.105
123.26............... Revise............... 123.202, 123.203
123.27............... Delete............... ..........................
123.28............... Revise............... 123.202
123.29............... Delete............... ..........................
123.40............... Delete............... ..........................
123.41............... Revise............... 123.14, 123.301, 123.302,
123.303
123.60-69............ Delete............... ..........................
------------------------------------------------------------------------
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5.U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35).
SBA certifies that this rule does not have a significant economic
impact on a substantial number of small entities within the meaning of
Executive Order 12866, or the Regulatory Flexibility Act, 5 U.S.C. 601,
et seq.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this rule contains no new reporting or recordkeeping
requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
has no federalism implications warranting preparation of the federalism
assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.
List of Subjects in 13 CFR Part 123
Disaster assistance, loan programs--business, Small businesses.
Pursuant to the authority set forth in sections 5(b)(6), 7(b)(1),
and 7(c)(6) of the Small Business Act, SBA revises Part 123 of Title 13
of the Code of Federal Regulations, to read as follows:
PART 123--DISASTER LOAN PROGRAM
Overview
123.1 What do these rules cover?
123.2 What are disaster loans and disaster declarations?
123.3 How are disaster declarations made?
123.4 What is a disaster area and why is it important?
123.5 What kinds of loans are available?
123.6 What does SBA look for when considering a disaster loan
applicant?
123.7 Are there restrictions on how disaster loans can be used?
123.8 Does SBA charge any fees for obtaining a disaster loan?
123.9 What happens if I don't use loan proceeds for the intended
purpose?
123.10 What happens if I cannot use my insurance proceeds to make
repairs?
123.11 Does SBA require collateral for any of its disaster loans?
123.12 Are books and records required?
123.13 What happens if my loan application is denied?
123.14 How does the Federal Debt Collection Procedures Act of 1990
apply?
123.15 What if I change my mind?
123.16 How are loans administered and serviced?
123.17 Do other Federal requirements apply?
Home Disaster Loans
123.100 Am I eligible to apply for a home disaster loan?
123.101 When am I not eligible to apply for a home disaster loan?
123.102 What circumstances would justify my relocating?
123.103 What happens if I am forced to move from my home?
123.104 What interest rate will I pay on my home disaster loan?
123.105 How much can I borrow with a home disaster loan and what
limits apply on use of funds and repayment terms?
123.106 What is eligible refinancing?
123.107 What is mitigation?
Physical Disaster Business Loans
123.200 Am I eligible to apply for a physical disaster business
loan?
123.201 When am I not eligible to apply for a physical disaster
business loan?
123.202 How much can my business borrow with a physical disaster
business loan?
123.203 What interest rate will my business pay on a physical
disaster business loan and what are its repayment terms?
Economic Injury Disaster Loans
123.300 Is my business eligible to apply for an economic injury
disaster loan?
123.301 When would my business not be eligible to apply for an
economic injury disaster loan?
[[Page 3305]]
123.302 What is the interest rate on an economic injury disaster
loan?
123.303 How can my business spend my economic injury disaster loan?
Authority: 15 U.S.C. 634(b)(6), 636(b), 636(c) and 636(f); Pub.
L. 102-395, 106 Stat. 1828, 1864; and Pub. L. 103-75, 107 Stat. 739.
Overview
Sec. 123.1 What do these rules cover?
This part covers the disaster loan programs authorized under the
Small Business Act, 15 U.S.C. 636(b), (c), and (f). Since SBA cannot
predict the occurrence or magnitude of disasters, it reserves the right
to change the rules in this part, without advance notice, by publishing
interim emergency regulations in the Federal Register.
Sec. 123.2 What are disaster loans and disaster declarations?
SBA offers low interest, fixed rate loans to disaster victims,
enabling them to repair or replace property damaged or destroyed in
declared disasters. It also offers such loans to affected small
businesses to help them recover from economic injury caused by such
disasters. Disaster declarations are official notices recognizing that
specific geographic areas have been damaged by floods and other acts of
nature, riots, civil disorders, or industrial accidents such as oil
spills. These disasters are sudden events which cause severe physical
damage, and do not include slower physical occurrences such as
shoreline erosion or gradual land settling. Sudden physical events that
cause substantial economic injury may be disasters even if they do not
cause physical damage to a victim's property. Past examples include
ocean conditions causing significant displacement (major ocean
currents) or closure (toxic algae blooms) of customary fishing waters,
as well as contamination of food or other products for human
consumption from unforeseeable and unintended events beyond the control
of the victims.
Sec. 123.3 How are disaster declarations made?
(a) There are four ways in which disaster declarations are issued
which make SBA disaster loans possible:
(1) The President declares a Major Disaster and authorizes Federal
assistance, including individual assistance (temporary housing and
Individual and Family Grant Assistance).
(2) SBA makes a physical disaster declaration, based on the
occurrence of at least a minimum amount of physical damage to
buildings, machinery, equipment, inventory, homes and other property.
Such damage usually must meet the following tests:
(i) In any county or other smaller political subdivision of a State
or U.S. possession, at least 25 homes or 25 businesses, or a
combination of at least 25 homes, businesses, or other eligible
institutions, each sustain uninsured losses of 40 percent or more of
the estimated fair replacement value or pre-disaster fair market value
of the damaged property, whichever is lower; or
(ii) In any such political subdivision, at least three businesses
each sustain uninsured losses of 40 percent or more of the estimated
fair replacement value or pre-disaster fair market value of the damaged
property, whichever is lower, and, as a direct result of such physical
damage, 25 percent or more of the work force in their community would
be unemployed for at least 90 days; and
(iii) the Governor of the State in which the disaster occurred
submits a written request to SBA for a physical disaster declaration by
SBA (OMB Approval No. 3245-0121). This request should be delivered to
the SBA Disaster Area Office serving the region where the disaster
occurred within 60 days of the date of the disaster.
(3) SBA makes an economic injury disaster declaration in response
to a determination of a natural disaster by the Secretary of
Agriculture.
(4) SBA makes an economic injury declaration in reliance on a state
certification that at least 5 small business concerns in a disaster
area have suffered substantial economic injury as a result of the
disaster and are in need of financial assistance not otherwise
available on reasonable terms. The state certification must be signed
by the Governor, must specify the county or counties or other political
subdivisions in which the disaster occurred, and must be delivered
(with supporting documentation) to the servicing SBA Disaster Area
Office within 120 days of the disaster occurrence.
(b) SBA publishes notice of any disaster declaration in the Federal
Register. The published notice will identify the kinds of assistance
available, the date and nature of the disaster, and the deadline and
location for filing loan applications. Additionally, SBA will use the
local media to inform potential loan applicants where to obtain loan
applications and otherwise to assist victims in applying for disaster
loans. SBA will accept applications after the announced deadline only
when SBA determines that the late filing resulted from substantial
causes beyond the control of the applicant.
Sec. 123.4 What is a disaster area and why is it important?
Each disaster declaration defines the geographical areas affected
by the disaster. Only those victims located in the declared disaster
area are eligible to apply for SBA disaster loans. When the President
declares a major disaster, the Federal Emergency Management Agency
defines the disaster area. In major disasters, economic injury disaster
loans may be made for victims in contiguous counties or other political
subdivisions. Disaster declarations issued by the Administrator of SBA
include contiguous counties for both physical and economic injury
assistance. Contiguous counties or other political subdivisions are
those land areas which abut the land area of the declared disaster area
without geographic separation other than by a minor body of water, not
to exceed one mile between the land areas of such counties.
Sec. 123.5 What kinds of loans are available?
SBA offers three kinds of disaster loans: physical disaster home
loans, physical disaster business loans, and economic injury business
loans. SBA makes these loans directly or in participation with a
financial institution. If a loan is made in participation with a
financial institution, SBA's share in that loan may not exceed 90
percent.
Sec. 123.6 What does SBA look for when considering a disaster loan
applicant?
There must be reasonable assurance that you can repay your loan out
of your personal or business cash flow, and you must have satisfactory
credit and character. SBA will not make a loan to you if repayment
depends upon the sale of collateral through foreclosure or any other
disposition of assets owned by you. SBA is prohibited by statute from
making a loan to you if you are engaged in the production or
distribution of any product or service that has been determined to be
obscene by a court.
Sec. 123.7 Are there restrictions on how disaster loans can be used?
You must use disaster loans to restore or replace your primary home
(including a mobile home used as a primary residence) and your personal
or business property as nearly as possible to their condition before
the disaster occurred, and within certain limits, to protect damaged or
destroyed real property from possible future similar disasters.
[[Page 3306]]
Sec. 123.8 Does SBA charge any fees for obtaining a disaster loan?
SBA does not charge points, closing, or servicing fees on any
disaster loan. You will be responsible for payment of any closing costs
owed to third parties, such as recording fees and title insurance
premiums. If your loan is made in participation with a financial
institution, SBA will charge a guarantee fee to the financial
institution, which then may recover the guarantee fee from you.
Sec. 123.9 What happens if I don't use loan proceeds for the intended
purpose?
(a) When SBA approves each loan application, it issues a loan
authorization which specifies the amount of the loan, repayment terms,
any collateral requirements, and the permitted use of loan proceeds. If
you wrongfully misapply these proceeds, you will be liable to SBA for
one and one-half times the proceeds disbursed to you as of the date SBA
learns of your wrongful misapplication. Wrongful misapplication means
the willful use of any loan proceeds without SBA approval contrary to
the loan authorization. If you fail to use loan proceeds for authorized
purposes for 60 days or more after receiving a loan disbursement check,
such non-use also is considered a wrongful misapplication of the
proceeds.
(b) If SBA learns that you may have misapplied your loan proceeds,
SBA will notify you at your last known address, by certified mail,
return receipt requested. You will be given at least 30 days to submit
to SBA evidence that you have not misapplied the loan proceeds or that
you have corrected any such misapplication. Any failure to respond in
time will be considered an admission that you misapplied the proceeds.
If SBA finds a wrongful misapplication, it will cancel any undisbursed
loan proceeds, call the loan, and begin collection measures to collect
your outstanding loan balance and the civil penalty. You may also face
criminal prosecution or civil or administrative action.
Sec. 123.10 What happens if I cannot use my insurance proceeds to make
repairs?
If you must pay insurance proceeds to the holder of a recorded lien
or encumbrance against your damaged property instead of using them to
make repairs, you may apply to SBA for the full amount needed to make
such repairs. If you voluntarily pay insurance proceeds to a recorded
lienholder, your loan eligibility is reduced by the amount of the
voluntary payment.
Sec. 123.11 Does SBA require collateral for any of its disaster loans?
Generally, SBA will not require that you pledge collateral to
secure a disaster home loan or a physical disaster business loan of
$10,000 or less, or an economic injury disaster loan of $5,000 or less.
For loans larger than these amounts, you will be required to provide
available collateral such as a lien on the damaged or replacement
property, a security interest in personal property, or both.
(a) Sometimes a borrower, including affiliates as defined in Part
121 of this title, will have more than one loan after a single
disaster. In deciding whether collateral is required, SBA will add up
all physical disaster loans to see if they exceed $10,000 and all
economic injury disaster loans to see if they exceed $5,000.
(b) SBA will not decline a loan if you lack a particular amount of
collateral as long as it is reasonably sure that you can repay your
loan. If you refuse to pledge available collateral when requested by
SBA, however, SBA may decline or cancel your loan.
Sec. 123.12 Are books and records required?
You must retain complete records of all transactions financed with
your SBA loan proceeds, including copies of all contracts and receipts,
for a period of 3 years after you receive your final disbursement of
loan proceeds. If you have a physical disaster business or economic
injury loan, you must also maintain current and accurate books of
account, including financial and operating statements, insurance
policies, and tax returns. You must retain applicable books and records
for 3 years after your loan matures including any extensions, or from
the date when your loan is paid in full, whichever occurs first. You
must make available to SBA or other authorized government personnel
upon request all such books and records for inspection, audit, and
reproduction during normal business hours and you must also permit SBA
and any participating financial institution to inspect and appraise
your assets. (OMB Approval No. 3245-0110.)
Sec. 123.13 What happens if my loan application is denied?
(a) If SBA denies your loan application, SBA will notify you in
writing and set forth the specific reasons for the denial. Any
applicant whose request for a loan is declined for reasons other than
size (not being a small business) has the right to present information
to overcome the reason or reasons for the decline and to request
reconsideration in writing. (OMB Approval No. 3245-0122.)
(b) Any decline due to size can only be appealed as set forth in
Part 121 of this chapter.
(c) Any request for reconsideration must be received by the SBA
office that declined the original application within six months of the
date of the declined notice. After six months, a new loan application
is required.
(d) A request for reconsideration must contain all significant new
information that you rely on to overcome SBA's denial of your original
loan application. Your request for reconsideration of a business loan
application must also be accompanied by current business financial
statements.
(e) If SBA declines your application a second time, you have the
right to appeal in writing to the Area Director's Office. All appeals
must be received by the office that declined the prior reconsideration
within 30 days of the decline action. Your request must state that you
are appealing, and must give specific reasons why the decline action
should be reversed.
(f) The decision of the Area Director is final unless:
(1) The Area Director does not have authority to approve the
requested loan;
(2) The Area Director refers the matter to the Associate
Administrator for Disaster Assistance; or
(3) The Associate Administrator for Disaster Assistance, upon a
showing of special circumstances, requests the Area Director's office
to forward the matter to him or her for final consideration. Special
circumstances may include, but are not limited to, policy
considerations, alleged improper acts by SBA personnel or others in
processing the application, and conflicting policy interpretations
between two Area Offices.
Sec. 123.14 How does the Federal Debt Collection Procedures Act of
1990 apply?
(a) Under the Federal Debt Collection Procedures Act of 1990 (28
U.S.C. 3201(e)), a debtor who owns property which is subject to an
outstanding judgment lien for a debt owed to the United States
generally is not eligible to receive physical and economic injury
disaster loans. The SBA Associate Administrator for Disaster
Assistance, or designee, may waive this restriction as to disaster
loans upon a demonstration of good cause. Good cause means a written
representation by you under oath which convinces SBA that:
(1) The declared disaster was a major contributing factor to the
delinquency which led to the judgment lien, regardless of when the
original debt was incurred; or
[[Page 3307]]
(2) The disaster directly prevented you from fulfilling the terms
of an agreement with SBA or any other Federal Government entity to
satisfy its pre-disaster judgment lien; in this situation, the judgment
creditor must certify to SBA that you were complying with the agreement
to satisfy the judgment lien when the disaster occurred; or
(3) Other circumstances exist which would justify a waiver.
(b) The waiver determination by the Associate Administrator for
Disaster Assistance, or designee, is a final, non-appealable decision.
The granting of a waiver does not include loan approval; a waiver
recipient must then follow normal loan application procedures.
Sec. 123.15 What if I change my mind?
If SBA required you to pledge collateral for your loan, you may
change your mind and rescind your loan pursuant to the Consumer Credit
Protection Act, 15 U.S.C. 1601, and Regulation Z of the Federal Reserve
Board, 12 CFR Part 226. Your note and any collateral documents signed
by you will be canceled upon your return of all loan proceeds and your
payment of any interest accrued.
Sec. 123.16 How are loans administered and serviced?
(a) If you obtained your disaster loan from a participating lender,
that lender is responsible for closing and servicing your loan. If you
obtained your loan directly from SBA, your loan will be closed and
serviced by SBA. The SBA rules on servicing are found in Part 120 of
this chapter.
(b) If you are unable to pay your SBA loan installments in a timely
manner for reasons substantially beyond your control, you may request
that SBA suspend your loan payments, extend your maturity, or both.
Sec. 123.17 Do other Federal requirements apply?
As a condition of disbursement, you must be in compliance with
certain requirements relating to flood insurance, lead-based paint,
earthquake hazards, coastal barrier islands, and child support
obligations, as set forth in Secs. 120.170 through 120.175 of this
chapter.
Home Disaster Loans
Sec. 123.100 Am I eligible to apply for a home disaster loan?
(a) You are eligible to apply for a home disaster loan if you:
(1) Own and occupy your primary residence and have suffered a
physical loss to your primary residence, personal property, or both; or
(2) Do not own your primary residence, but have suffered a physical
loss to your personal property. Family members sharing a residence are
eligible if they are not dependents of the owners of the residence.
(b) Losses may be claimed only by the owners of the property at the
time of the disaster, and all such losses will be verified by SBA. SBA
will consider beneficial ownership as well as legal title (for real or
personal property) in determining who suffered the loss.
Sec. 123.101 When am I not eligible for a home disaster loan?
You are not eligible for a home disaster loan if:
(a) You have been convicted, during the past year, of a felony
during and in connection with a riot or civil disorder or other
declared disaster;
(b) You acquired voluntarily more than a 50 percent ownership
interest in the damaged property after the disaster, and no contract of
sale existed at the time of the disaster;
(c) Your damaged property can be repaired or replaced with the
proceeds of insurance, gifts or other compensation, including
condemnation awards (with one exception, these amounts must either be
deducted from the amount of the claimed losses or, if received after
SBA has approved and disbursed a loan, must be paid to SBA as principal
payments on your loan. You must notify SBA of any such recoveries
collected after receiving an SBA disaster loan (OMB Approval No. 3245-
0124)). The one exception applies to amounts received under the
Individual and Family Grant Program of the Federal Emergency Management
Agency solely to meet an emergency need pending processing of an SBA
loan. In such an event, you must repay the financial assistance with
SBA loan proceeds if it was used for purposes also eligible for an SBA
loan);
(d) SBA determines that you assumed the risk (for example, by not
maintaining flood insurance as required by an earlier SBA disaster loan
when the current loss is also due to flood);
(e) Your damaged property is a secondary home (although if you
rented the property out before the disaster and the property would not
constitute a ``residence'' under the provisions of Section 280A of the
Internal Revenue Code (26 U.S.C. 280A), you may be eligible for a
physical disaster business loan);
(f) Your damaged property is the type of vehicle normally used for
recreational purposes, such as motorhomes, aircraft, and boats;
(g) Your damaged property consists of cash or securities;
(h) The replacement value of your damaged personal property is
extraordinarily high and not easily verified, such as the value of
antiques, artworks, or hobby collections;
(i) You or other principal owners of the damaged property are
presently incarcerated, or on probation or parole following conviction
for a serious criminal offense;
(j) Your only interest in the damaged property is in the form of a
security interest, mortgage, or deed of trust;
(k) The damaged building, including contents, was newly constructed
or substantially improved on or after February 9, 1989, and (without a
significant business justification) is located seaward of mean high
tide or entirely in or over water; or
(l) You voluntarily decide to relocate outside the business area in
which the disaster has occurred, and there are no special or unusual
circumstances leading to your decision (business area means the
municipality which provides general governmental services to your
damaged home or, if not located in a municipality, the county or
equivalent political entity in which your damaged home is located).
Sec. 123.102 What circumstances would justify my relocating?
SBA may approve a loan if you intend to relocate outside the
business area in which the disaster has occurred if your relocation is
caused by such special or unusual circumstances as:
(a) demonstrable risk that the business area will suffer future
disasters;
(b) a change in employment status (such as loss of job, transfer,
lack of adequate job opportunities within the business area or
scheduled retirement within 18 months after the disaster occurs);
(c) medical reasons; or
(d) special family considerations which necessitate a move outside
of the business area.
Sec. 123.103 What happens if I am forced to move from my home?
If you must relocate inside or outside the business area because
local authorities will not allow you to repair your damaged property,
SBA considers this to be a total loss and a mandatory relocation. In
this case, your loan would be an amount that SBA considers sufficient
to replace your residence at your new location, plus funds to cover
losses of personal property and eligible refinancing.
[[Page 3308]]
Sec. 123.104 What interest rate will I pay on my home disaster loan?
If you can obtain credit elsewhere, your interest rate is set by a
statutory formula, but will not exceed 8 percent per annum. If you
cannot obtain credit elsewhere, your interest rate is one-half the
statutory rate, but will not exceed 4 percent per annum. Credit
elsewhere means that, with your cash flow and disposable assets, SBA
believes you could obtain financing from non-federal sources on
reasonable terms. If you cannot obtain credit elsewhere, you also may
be able to borrow from SBA to refinance existing recorded liens against
your damaged real property. Under prior legislation, some SBA disaster
loans had split interest rates. On any such loan, repayments of
principal are applied first to that portion of the loan with the lowest
interest rate.
Sec. 123.105 How much can I borrow with a home disaster loan and what
limits apply on use of funds and repayment terms?
(a) For all disasters occurring on or after October 26, 1993, there
are limits on how much money you can borrow for particular purposes:
(1) $40,000 for repair or replacement of household and personal
effects;
(2) $200,000 for repair or replacement of a primary residence
(including upgrading in order to meet minimum standards of safety and
decency or current building code requirements). Repair or replacement
of landscaping and/or recreational facilities cannot exceed $5,000;
(3) $200,000 for eligible refinancing purposes; and
(4) 20 percent of the loan amount (not including refinancing) up to
a maximum of $48,000 for mitigation (see Sec. 123.107).
(b) You may not use loan proceeds to repay any debts on personal
property, secured or unsecured, unless you incurred those debts as a
direct result of the disaster.
(c) SBA determines the loan maturity and repayment terms based on
your needs and your ability to pay. Generally, you will pay equal
monthly installments of principal and interest, beginning five months
from the date of the loan, as shown on the Note securing the loan. SBA
will consider other payment terms if you have seasonal or fluctuating
income, and SBA may allow installment payments of varying amounts over
the first two years of the loan. The maximum maturity for a home
disaster loan is 30 years. There is no penalty for prepayment of home
disaster loans.
Sec. 123.106 What is eligible refinancing?
(a) If your home (primary residence) is totally destroyed or
substantially damaged, and you do not have credit elsewhere, SBA may
allow you to borrow money to refinance recorded liens or encumbrances
on your home. Your home is totally destroyed or substantially damaged
if it has suffered uninsured or otherwise uncompensated damage which,
at the time of the disaster, is either:
(1) 40 percent or more of the home's market value or replacement
cost at the time of the disaster, including land value, whichever is
less; or
(2) 50 percent or more of its market value or replacement cost at
the time of the disaster, not including land value, whichever is less.
(b) Your home disaster loan for refinancing existing liens or
encumbrances cannot exceed an amount equal to the lesser of $200,000,
or the physical damage to your primary residence after reductions for
any insurance or other recovery.
Sec. 123.107 What is mitigation?
Mitigation means specific measures taken by you to protect against
recurring damage in similar future disasters. Examples include
retaining walls, sea walls, grading and contouring land, relocating
utilities and modifying structures. The money that you can borrow for
mitigation is limited to the lesser of the cost of mitigation, or 20
percent of your loan to repair or replace your damaged primary
residence and personal property. SBA will not accept a request for a
loan increase for mitigation filed after final disbursement of your
original loan unless you can show that your request was late because of
substantial reasons beyond your control.
Physical Disaster Business Loans
Sec. 123.200 Am I eligible to apply for a physical disaster business
loan?
(a) Almost any business concern or charitable or other non-profit
entity whose real or tangible personal property is damaged in a
declared disaster area is eligible to apply for a physical disaster
business loan. Your business may be a sole proprietorship, partnership,
corporation, limited liability company, or other legal entity
recognized under State law. Your business' size (average annual
receipts or number of employees) is not taken into consideration in
determining your eligibility for a physical disaster business loan. If
your damaged business occupied rented space at the time of the
disaster, and the terms of your business' lease require you to make
repairs to your business' building, you may have suffered a physical
loss and can apply for a physical business disaster loan to repair the
property. In all other cases, the owner of the building is the eligible
loan applicant.
(b) Damaged vehicles, of the type normally used for recreational
purposes, such as motorhomes, aircraft, and boats, may be repaired or
replaced with SBA loan proceeds if you can submit evidence that the
damaged vehicles were used in your business at the time of the
disaster.
Sec. 123.201 When am I not eligible to apply for a physical disaster
business loan?
(a) You are not eligible for a physical disaster business loan if
your business is an agricultural enterprise or if you (or any principal
of the business) fit into any of the categories in Sec. 123.101.
Agricultural enterprise means a business primarily engaged in the
production of food and fiber, ranching and raising of livestock,
aquaculture and all other farming and agriculture-related industries.
(b) Sometimes a damaged business is engaged in both agricultural
and non-agricultural business activities. If the primary business
activity of your damaged business is not an agricultural enterprise,
you may apply for a physical disaster business loan, but loan proceeds
may not be used, directly or indirectly, for the benefit of your
agricultural enterprises, even if they also suffered damage.
(c) If your business is going to relocate voluntarily outside the
business area in which the disaster occurred, you are not eligible for
a physical disaster business loan. If, however, the relocation is due
to uncontrollable or compelling circumstances, SBA will consider the
relocation to be involuntary and eligible for a loan. Such
circumstances may include, but are not limited to:
(1) The elimination or substantial decrease in the market for your
products or services, as a consequence of the disaster;
(2) A change in the demographics of your business area within 18
months prior to the disaster, or as a result of the disaster, which
makes it uneconomical to continue operations in your business area;
(3) A substantial change in your cost of doing business, as a
result of the disaster, which makes the continuation of your business
in the business area not economically viable;
(4) Location of your business in a hazardous area such as a special
flood hazard area or an earthquake-prone area;
(5) A change in the public infrastructure in your business area
which occurred within 18 months or as a result of the disaster that
would result
[[Page 3309]]
in substantially increased expenses for your business in the business
area;
(6) Your implementation of decisions adopted and at least partially
implemented within 18 months prior to the disaster to move your
business out of the business area; and
(7) Other factors which undermine the economic viability of your
business area.
Sec. 123.202 How much can my business borrow with a physical disaster
business loan?
(a) Disaster business loans, including both physical disaster and
economic injury loans to the same borrower, together with its
affiliates, cannot exceed the greater of the uncompensated physical
loss and economic injury or $1.5 million. Physical disaster loans may
include amounts to meet current building code requirements. If your
business is a major source of employment, SBA may waive the $1.5
million limitation. A major source of employment is a business concern
which has one or more locations in the disaster area which:
(1) Employed 10 percent or more of the entire work force within the
commuting area of a geographically identifiable community (no larger
than a county), provided that the commuting area does not extend more
than 50 miles from such community; or
(2) Employed 5 percent of the work force in an industry within the
disaster area and, if the concern is a non-manufacturing concern,
employed no less than 50 employees in the disaster area, or if the
concern is a manufacturing concern, employed no less than 150 employees
in the disaster area; or
(3) Employed no less than 250 employees within the disaster area.
(b) SBA will consider waiving the $1.5 million loan limit only if:
(1) Your damaged location or locations are out of business or in
imminent danger of going out of business as a result of the disaster,
and a loan in excess of $1.5 million is necessary to reopen or keep
open the damaged locations in order to avoid substantial unemployment
in the disaster area; and
(2) You have used all reasonably available funds from your
business, its affiliates and its principal owners (20% or greater
ownership interest) and all available credit elsewhere (as described in
Sec. 123.104) to alleviate your physical damage and economic injury.
(c) Physical disaster business borrowers may request refinancing of
liens on both damaged real property and machinery and equipment, but
for an amount reduced by insurance or other compensation. To do so,
your business property must be totally destroyed or substantially
damaged, which means:
(1) 40 percent or more of the aggregate value (lesser of market
value or replacement cost at the time of the disaster) of the damaged
real property (including land) and damaged machinery and equipment; or
(2) 50 percent or more of the aggregate value (lesser of market
value or replacement cost at the time of the disaster) of the damaged
real property (excluding land) and damaged machinery and equipment.
(d) Loan funds allocated for repair or replacement of landscaping
or recreational facilities may not exceed $5,000 unless the landscaping
or recreational facilities fulfilled a functional need or contributed
to the generation of business.
Sec. 123.203 What interest rate will my business pay on a physical
disaster business loan and what are the repayment terms?
(a) SBA will announce interest rates with each disaster
declaration. If your business, together with its affiliates and
principal owners, have credit elsewhere, your interest rate is set by a
statutory formula, but will not exceed 8 percent per annum. If you do
not have credit elsewhere, your interest rate will not exceed 4 percent
per annum. The maturity of your loan depends upon your repayment
ability, but cannot exceed 3 years if you have credit elsewhere.
Otherwise, the maximum maturity is 30 years.
(b) Generally, you must pay equal monthly installments, of
principal and interest, beginning five months from the date of the loan
as shown on the Note. SBA will consider other payment terms if you have
seasonal or fluctuating income, and SBA may allow installment payments
of varying amounts over the first two years of the loan. There is no
penalty for prepayment for disaster loans.
Economic Injury Disaster Loans
Sec. 123.300 Is my business eligible to apply for an economic injury
disaster loan?
(a) If your business is located in a declared disaster area, and
suffered substantial economic injury as a direct result of a declared
disaster, you are eligible to apply for an economic injury disaster
loan.
(1) Substantial economic injury is such that a business concern is
unable to meet its obligations as they mature or to pay its ordinary
and necessary operating expenses.
(2) Loss of anticipated profits or a drop in sales is not
considered substantial economic injury for this purpose.
(b) Economic injury disaster loans are available only if you were a
small business (as defined in Part 121 of this chapter) when the
declared disaster commenced, you and your affiliates and principal
owners (20% or more ownership interest) have used all reasonably
available funds, and you are unable to obtain credit elsewhere (see
Sec. 123.104).
(c) Eligible businesses do not include agricultural enterprises,
but do include--
(1) Small nurseries affected by a drought disaster designated by
the Secretary of Agriculture (nurseries are commercial establishments
deriving 50 percent or more of their annual receipts from the
production and sale of ornamental plants and other nursery products,
including, but not limited to, bulbs, florist greens, foliage, flowers,
flower and vegetable seeds, shrubbery, and sod);
(2) Small agricultural cooperatives; and
(3) Producer cooperatives.
Sec. 123.301 When would my business not be eligible to apply for an
economic injury disaster loan?
Your business is not eligible for an economic disaster loan if you
(or any principal of the business) fit into any of the categories in
Secs. 123.101 and 123.201, or if your business is:
(a) Engaged in gambling, lending, multi-level sales distribution,
loan packaging, speculation, or investment (except for real estate
investment with property held for rental when the disaster occurred);
(b) A non-profit or charitable concern;
(c) A consumer or marketing cooperative; or
(d) Not a small business concern.
Sec. 123.302 What is the interest rate on an economic injury disaster
loan?
Your economic injury loan will have an interest rate of 4 percent
per annum or less.
Sec. 123.303 How can my business spend my economic injury disaster
loan?
(a) You can only use the loan proceeds for working capital
necessary to carry your concern until resumption of normal operations
and for expenditures necessary to alleviate the specific economic
injury, but not to exceed that which the business could have provided
had the injury not occurred.
(b) Loan proceeds may not be used to:
[[Page 3310]]
(1) Refinance indebtedness which you incurred prior to the disaster
event;
(2) Make payments on loans owned by another federal agency
(including SBA) or a Small Business Investment Company licensed under
the Small Business Investment Act;
(3) Pay, directly or indirectly, any obligations resulting from a
federal, state or local tax penalty as a result of negligence or fraud,
or any non-tax criminal fine, civil fine, or penalty for non-compliance
with a law, regulation, or order of a federal, state, regional, or
local agency or similar matter;
(4) Repair physical damage; or
(5) Pay dividends or other disbursements to owners, partners,
officers or stockholders, except for reasonable remuneration directly
related to their performance of services for the business.
Dated: January 19, 1996.
Philip Lader,
Administrator.
[FR Doc. 96-1162 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P
Complete official Federal Register PDF
FR Doc. 96-1157 Government Contracting Assistance
[Federal Register Volume 61, Number 21 (Wednesday, January 31, 1996)]
[Rules and Regulations]
[Pages 3310-3316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1157]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 125
Government Contracting Assistance
AGENCY: Small Business Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: In response to President Clinton's Government-wide regulatory
reform initiative, the Small Business Administration (SBA) has
completed a page-by-page, line-by-line review of all of its existing
regulations to determine which should be revised or eliminated. This
rule would eliminate seven sections which are currently contained in 13
CFR Part 125 pertaining to SBA's procurement assistance programs. The
Part will be retitled Government Contracting Assistance.
EFFECTIVE DATE: This rule is effective on March 1, 1996.
FOR FURTHER INFORMATION CONTACT: John W. Klein, Chief Counsel for
Special Programs, at (202) 205-6645.
SUPPLEMENTARY INFORMATION: Part 125 of chapter I of title 13 of the
Code of Federal Regulations sets forth the policies and procedures by
which SBA regulates Government contracting. On November 27, 1995 (60 FR
58276), SBA published a proposed rule in the Federal Register to
reorganize part 125, eliminating seven sections and streamlining other
sections. SBA proposed minor, but substantive, rule changes--notably,
removing Walsh-Healey determinations from the Certificate of Competency
process; increasing the threshold over which a contracting officer
could appeal the award of a Certificate of Competency to Headquarters
from $25,000 to $100,000, and clarifying that prospective limitations
on subcontracting applied to base year contracts, irrespective of
option years.
SBA received sixteen timely comments to this proposed revision.
Eleven of the comments were directed at proposed Sec. 125.4, which
concerns Government property sale assistance. One was directed at the
proposed elimination of Sec. 125.10, the Procurement Automated Source
System (PASS). The remainder raised objections to proposed Sec. 125.6,
dealing with subcontracting limitations.
SBA proposed a streamlined section on government property sales at
Sec. 125.4. The proposed section described the purpose of the
Government property sales assistance program; described what the
program does; described what sorts of economic activities are covered
by the program; and referred the reader to the appropriate sections in
Part 121 to obtain the size standards for the program. This section
replaces present Sec. 125.8, which recites the size standards in
detail, describes who in SBA is responsible for administering the
program, sets forth what interagency agreements SBA has concerning the
program and with whom, sets forth the form number of the applicable
certification, describes penalties for contract breach, and sets forth
the program's ``emphasis'', not only in the present but in the past as
well.
Eight of the eleven comments discussing this section expressed the
mistaken belief that the proposed revision would eliminate all
references to the Government property sales assistance program. All
eleven of the comments expressed concern that in the absence of the
current detailed regulation, the general public, the timber industry
and employees of the Federal Government would lack sufficient
information to properly utilize the program. Some of these commenters
expressed concern that in the absence of the particulars of present
Sec. 125.8, other agencies having interagency agreements with the SBA
would be unaware of their responsibilities under those agreements.
Conversely, other commenters were concerned that the proposed revision
would somehow ``signal'' those other agencies that they were no longer
bound by their agreements. Some commenters were concerned that without
a regulation which assigns specific duties to specific SBA employees,
SBA would soon eliminate those employees. Finally, one commenter claims
that were SBA not to designate in the Code of Federal Regulations which
employees were to carry out which responsibilities under the Government
property sales assistance program, SBA would be in violation of the
Freedom of Information Act (5 U.S.C. 552).
SBA has considered all of these comments, but believes that
Sec. 125.4 as proposed is an appropriate regulation. Current Sec. 125.8
has little useful information for either interested small businesses or
for federal agencies conducting sales under the program. The statutory
language replicated in current Sec. 125.8 is among the most general in
the entire Small Business Act, guaranteeing only that a ``fair''
proportion of sales and leases be given to small businesses. The bare
recitation of which agencies have Interagency Agreements with SBA which
relate to the Government Property Sales Assistance Program provides no
useful information to the interested small business. The contents of
those agreements, which may be obtained from the Small Business
Administration upon request, may be of help, but they are not printed
in the present regulation, and to include them in the Code of Federal
Regulations would be impractical. The agencies themselves, of course,
know what the agreements require them to do, and a regulation is not
needed to create enforceability.
SBA's own obligations under the Government Property Sales
Assistance Program remain unaffected by removing specific references to
which SBA employee performs which task. Descriptions of duties of
employees and other internal management matters need not be contained
in regulations.
The size standards relevant to the timber set-aside program will be
restated, with more clarity, in new Secs. 121.506-121.508 of this
chapter. A proposed rule revising Part 121 of these regulations was
published on November 24, 1995, and will become final when this rule
becomes effective. There is no substantive change to the size standard.
SBA disagrees with the contention that the Freedom of Information
Act requires that SBA set forth in regulation the responsibilities of
the property sales industrial representative, as the current regulation
does. FOIA merely requires that agencies publish descriptions of their
organization, not that they publish specific responsibilities for
specific staff. Moreover, FOIA merely requires that this publication be
in the Federal Register, not in regulations.
One commenter urges that Sec. 125.10 be retained if its deletion
``in any way diminishes the quality, availability, or emphasis for this
program.'' The
[[Page 3311]]
deletion of this regulation will have none of these adverse effects.
Three of the commenters objected to proposed Sec. 125.6(e), which
would measure a small business offeror's compliance with subcontracting
limitation percentages on the basis of the work it will perform during
the base contract period only, regardless of the work it does during
contract option years.
The commenters argued that SBA's proposed regulation was contrary
to the legislative intent behind the statute, which was to apply the
subcontracting limitations to the anticipated length of the contract,
rather than to individual task orders. One of the commenters also
argued that such a regulation would make it particularly difficult for
small businesses to bid in high-tech fields, where the common practice
of the industry is to subcontract large portions of the contract at the
beginning phases and to gradually perform more and more of the work in-
house. Another commenter also pointed out that the proposed rule was
inconsistent with Sec. 17.206(a) of the Federal Acquisition Regulation
(48 CFR Sec. 17.206(a)), which requires purchasing agencies to evaluate
proposals over their full length, rather than simply the base year.
Unfortunately, the mere existence of option years in a contract is
not necessarily dispositive of the question of the anticipated length
of that contract. Some agencies offer contracts with short base periods
and many option years as the best way to protect the agency's
interests, without any real expectation that the awardee will perform
the contract for the full period. It would defeat the purpose of
Sec. 644(o) to permit, for example, an award to a concern which ends up
subcontracting most of the performance during the actual period of
performance on the basis of its promise to perform with its own
personnel during option years which are never awarded.
However, SBA agrees that where the purchasing activity awards the
contract on the basis of an evaluation of more than the base period,
SBA should accept this evaluation as evidence of the anticipated length
of the contract. Accordingly, SBA has modified new Sec. 125.6(e) so
that where a proposal is evaluated on the basis of more than the base
year, the contract awardee must perform the statutory minimum over the
period of time upon which the evaluation is made. In all other
instances, the contract awardee must perform the statutory minimum over
the base period.
Another commenter objected to the language of Sec. 125.6(a), which
sets forth the subcontracting limitations, where applicable, for each
type of procurement. This commenter contended that the language of
present Sec. 124.314, which sets forth subcontracting limitations on
8(a) concerns, is more clear. SBA disagrees. SBA believes the wording
of Sec. 125.6 merely eliminates unnecessary wording. No substantive
difference is intended.
One commenter asked why proposed Sec. 125.6(a)(2), which
establishes a 50% performance of work requirement for contractors for
supplies (other than procurement from a regular dealer in such
supplies) establishes no performance or work requirement for regular
dealers. SBA believes that the statute imposes no requirement on
regular dealers to perform any percentage of the work.
A commenter noted that the language of proposed Sec. 125.6(b),
which establishes the definition of certain accounting terms for
purposes of complying with the limitations on subcontracting, may be
too burdensome for small business offerors who normally have less
formal accounting procedures. SBA does not consider it unduly
burdensome for small business offerors to employ these terms. The terms
need defining in a consistent way and the definitions are not overly
complex.
Two commenters noted that in many instances small business offerors
have not made at the time of their offer the decisions they need to
make in order to determine how much of the contract they intend to
subcontract. SBA must respect the need of federal agencies to determine
the eligibility of small business bidders by a date certain. In the
instance of a sealed bid, the contracting officer must be able to
determine whether a bidder is responsible at the time of bid opening
and, if it is not, must be able to move on to the next bidder.
Similarly, in the instance of a negotiated procurement, the small
business offeror will have substantially completed its subcontracting
intentions by the time it makes its best and final offer, and must be
able to commit to compliance with statutory limitations on
subcontracting at that point.
A commenter noted proposed Sec. 125.6(d) treated subcontracting
limitations as a responsibility, rather than a size, issue and stated
that this decision would raise questions as to whether the proposed
regulation was a renunciation of the ostensible subcontractor rule
found in Sec. 121.401(l)(4). SBA has decided to treat limitations on
subcontracting as a responsibility matter because it relates to how a
contractor intends to perform a specific contract and is analogous to
traditional responsibility issues such as capacity and credit.
Moreover, treating the issue in this way places the obligation to
question compliance with the contracting officer, and insures that the
contracting agency will be consulted before a negative determination is
overruled by SBA. This new rule will not affect the ostensible
subcontractor rule, which is being restated in new Sec. 121.103(f)(3).
Size protests will continue to be processed where the protester alleges
an anticipated awardee exceeds the applicable size standard due to a
joint venture relationship with a purported subcontractor, regardless
of whether the limitations on subcontracting percentages will be met by
the awardee.
Another comment was an objection to the provision of Sec. 125.6(f),
which provides that work which a concern intends to subcontract to
subsidiaries and affiliates would not count as work performed by the
concern. The commenter points out that SBA does not treat the affiliate
as a separate entity for purposes of size determination and argues that
it is inconsistent to treat the affiliate as a separate entity for
purposes of subcontracting. The commenter also points out that an
applicant can easily defeat this restriction by bidding as a joint
venture with its affiliate.
SBA believes that the governing statute, 15 U.S.C. 644(o), urges
this result. That statute refers to ``employees of the concern''
(contracts for services) and ``the concern will perform work''
(contracts for supplies). SBA regulations define a ``concern'' as ``a
business entity organized for profit * * * (which) may be in the legal
form of an individual proprietorship, partnership, corporation, joint
venture, association, trust or a cooperative * * *.'' (13 CFR 121.403).
An offeror and its affiliates are separate legal entities. Even if
the statute were construed to permit a different rule, SBA believes a
regulation defining ``concern'' differently for different purposes
could be burdensome and confusing. While it is true that SBA aggregates
for size purposes the employees or revenues of subsidiaries or
affiliates of a concern, SBA does not treat the different legal
entities as having merged or lost their separate identities in terms of
ownership, management, assets and liabilities. To credit work performed
by a subsidiary or an affiliate as work performed by the concern itself
would be inconsistent with this approach.
Finally, two commenters inquired as to how SBA or a contracting
officer can
[[Page 3312]]
determine an offeror's compliance with subcontracting restrictions
before an award. As a responsibility matter, the contracting officer
will determine whether an offeror intends to comply and if so, whether
it is capable of complying. SBA may then review adverse determinations.
If award occurs, the contracting officer will have a continuing
responsibility to monitor contract performance to assure compliance
with contract terms, including subcontracting limitations.
In addition to modifying the provision governing the period of time
considered for measuring compliance with statutory subcontracting
limitations, the final rule makes minor changes from the proposed rule
in order to further streamline the part. SBA has removed the list of
``additional responsibilities'' assigned to commercial marketing
representatives (CMRs) set forth in proposed Sec. 125.3(e). CMRs will
be assigned responsibilities in addition to their matching tasks as the
need arises. SBA has also deleted the last sentence of proposed
Sec. 125.6(b)(4), which was inadvertently included in the proposed
regulation. The treatment of leasing utility distribution facilities in
the context of this section is still under review. SBA also corrected
an inadvertent error contained in the proposed rule as to the
eligibility of kit assemblers for a certificate of competency
(Sec. 125.5(b)(1)(v)(B) of the proposed rule). The final rule will
continue SBA's policy of making COCs available to kit assemblers
regardless of the size of the manufacturer where the procurement is
unrestricted, and of making COCs available to kit assemblers on small
business set-asides only where they provide components manufactured
only by domestic small businesses. SBA has also removed language in
that subparagraph relating to the treatment of components manufactured
by directed sources where the sources are large businesses. Under
current regulations, contracting agencies must first obtain a waiver of
the nonmanufacturing rule from SBA before they may direct large
business sources in a small business set-aside. Accordingly, there is
no need to include additional language governing directed sources.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
SBA certifies that this rule will not have a significant economic
impact on a substantial number of small entities within the meaning of
Executive Order 12866 or the Regulatory Flexibility Act, 5 U.S.C. 601,
et seq. This rule eliminates seven sections of SBA's regulations that
SBA has determined to be obsolete, unnecessary, or duplicative. The
remaining regulations have been rewritten for clarity and ease of use.
No contracting opportunities for small business will be affected by
this rule. Therefore, it is not likely to have an annual economic
impact of $100 million or more, result in a major increase in costs or
prices, or have a significant adverse effect on competition or the U.S.
economy.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this rule contains no new reporting or recordkeeping
requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
does not have any federalism implications warranting the preparation of
a Federalism Assessment.
For purposes of Executive Order 12778, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 2 of that Order.
List of Subjects in 13 CFR Part 125
Government contracts, Government procurement, Reporting and
recordkeeping requirements, Small businesses, Technical assistance.
Accordingly, pursuant to the authority set forth in Section 4 of
Public Law 101-515 (104 Stat. 2140), Section 610(a) of Public Law 100-
202 (101 Stat. 1329-39), sections 5(b)(6), 8 and 15 of the Small
Business Act, 72 Stat. 384, as amended (15 U.S.C. 631, et seq.), 31
U.S.C. 9701, 9702, SBA hereby revises Part 125 of Title 13 of the Code
of Federal Regulations to read as follows:
PART 125--GOVERNMENT CONTRACTING PROGRAMS
Sec.
125.1 Programs included.
125.2 Prime contracting assistance.
125.3 Subcontracting assistance.
125.4 Government property sales assistance.
125.5 Certificate of Competency program.
125.6 Prime contractor performance requirements (limitations on
subcontracting).
Authority: 15 U.S.C. 634(b)(6), 637, and 644; 31 U.S.C. 9701,
9702.
Sec. 125.1 Programs included.
The regulations in this part relate to the Government contracting
assistance programs of SBA. There are four main programs: Prime
contracting assistance; Subcontracting assistance; Government property
sales assistance; and the Certificate of Competency program. The
objective of the programs is to assist small businesses in obtaining a
fair share of Federal Government contracts, subcontracts, and property
sales.
Sec. 125.2 Prime contracting assistance.
(a) Traditional PCR responsibilities. (1) SBA Procurement Center
Representatives (PCRs) are located at Federal agencies and buying
activities which have major contracting programs. PCRs review all
acquisitions not set aside for small businesses to determine whether a
set-aside would be appropriate. In cases where there is disagreement
between a PCR and the contracting officer over the suitability of a
particular acquisition for a small business set-aside, the PCR may
initiate an appeal to the head of the contracting activity. If the head
of the contracting activity agrees with the contracting officer, SBA
may appeal to the secretary of the department or head of the agency.
The procedures and time limits for such appeals are set forth in
Sec. 19.505 of the Federal Acquisition Regulation (FAR) (48 CFR
19.505).
(2) PCRs review and evaluate the small business programs of Federal
agencies and buying activities and make recommendations for
improvement. They also recommend small business, small women-owned
business, and small disadvantaged business sources for use by
contracting activities and assist these businesses in obtaining Federal
contracts and subcontracts. Other authorized duties of a PCR are set
forth in the FAR in 48 CFR 19.402(c) and in the Small Business Act (the
Act) in Section 15(a) (15 U.S.C. 644(a)).
(b) BPCR responsibilities. (1) SBA is required by section 403 of
Public Law 98-577 (15 U.S.C. 644(l)) to assign a breakout PCR (BPCR) to
major contracting centers. A major contracting center is a center that,
as determined by SBA, purchases substantial dollar amounts of other
than commercial items, and which has the potential to achieve
significant savings as a result of the assignment of a BPCR.
(2) BPCRs advocate full and open competition in the Federal
contracting process and recommend the breakout for competition of items
and requirements which previously have not been competed. They may
appeal the failure by the buying activity to act favorably on a
recommendation in accord with the appeal procedures set forth in
Sec. 19.505 of the FAR (48 CFR 19.505). BPCRs also review restrictions
and obstacles to competition and make recommendations for improvement.
Other authorized functions of a BPCR are set forth in 48 CFR 19.403(c)
of the
[[Page 3313]]
FAR and Section 15(l) of the Act (15 U.S.C. 644(l)).
Sec. 125.3 Subcontracting assistance.
(a) The purpose of the subcontracting assistance program is to
achieve maximum utilization of small business by major prime
contractors. The Act requires other-than-small firms awarded contracts
that offer subcontracting possibilities by the Federal Government in
excess of $500,000, or $1 million for construction of a public
facility, to submit a subcontracting plan to the contracting agency.
The FAR sets forth the requirements for subcontracting plans in 48 CFR
part 19, subpart 19.7, and 48 CFR 52.219-9.
(b) Upon determination of the successful subcontract offeror, but
prior to award, the prime contractor must inform each unsuccessful
subcontract offeror in writing of the name and location of the apparent
successful offeror. This is applicable to all subcontracts over
$10,000.
(c) SBA Commercial Market Representatives (CMRs) facilitate the
process of matching large prime contractors with small, small
disadvantaged, and small women-owned subcontractors. CMRs identify,
develop, and market small businesses to the prime contractors and
assist the small firms in obtaining subcontracts.
(d) Each CMR has a portfolio of prime contractors and conducts
periodic compliance reviews and needs assessments of the companies in
this portfolio. CMRs are also required to perform opportunity
development and source identification. Opportunity development means
assessing the current and future needs of the prime contractors. Source
identification means identifying those small, small disadvantaged, and
small women-owned firms which can fulfill the needs assessed from the
opportunity development process.
Sec. 125.4 Government property sales assistance.
(a) The purpose of SBA's Government property sales assistance
program is to:
(1) Insure that small businesses obtain their fair share of all
Federal real and personal property qualifying for sale or other
competitive disposal action; and
(2) Assist small businesses in obtaining Federal property being
processed for disposal, sale, or lease.
(b) SBA property sales assistance primarily consists of two
activities:
(1) Obtaining small business set-asides when necessary to insure
that a fair share of Government property sales are made to small
businesses; and
(2) Providing advice and assistance to small businesses on all
matters pertaining to sale or lease of Government property.
(c) The program is intended to cover the following categories of
Government property:
(1) Sales of timber and related forest products;
(2) Sales of strategic material from national stockpiles;
(3) Sales of royalty oil by the Department of Interior's Minerals
Management Service;
(4) Leases involving rights to minerals, petroleum, coal, and
vegetation; and
(5) Sales of surplus real and personal property.
(d) SBA has established specific small business size standards and
rules for the sale or lease of the different kinds of Government
property. These provisions are contained in Secs. 121.501 through
121.514 of this chapter.
Sec. 125.5 Certificate of Competency Program.
(a) General. (1) The Certificate of Competency (COC) Program is
authorized under section 8(b)(7) of the Small Business Act. A COC is a
written instrument issued by SBA to a Government contracting officer,
certifying that one or more named small business concerns possess the
responsibility to perform a specific Government procurement (or sale)
contract. The COC Program is applicable to all Government procurement
actions. For purposes of this Section, the term ``United States''
includes its territories, possessions, and the Commonwealth of Puerto
Rico.
(2) A contracting officer must, upon determining an apparent low
small business offeror to be nonresponsible, refer that small business
to SBA for a possible COC, even if the next low apparently responsible
offeror is also a small business.
(3) A small business offeror referred to SBA as nonresponsible may
apply to SBA for a COC. Where the applicant is a non-manufacturing
offeror on a supply contract, the COC applies to the responsibility of
the non-manufacturer, not to that of the manufacturer.
(b) COC Eligibility. (1) The offeror seeking a COC has the burden
of proof to demonstrate its eligibility for COC review. To be eligible
for the COC program, a firm must meet the following criteria:
(i) It must qualify as a small business concern under the size
standard applicable to the procurement. Where the solicitation fails to
specify a size standard or Standard Industrial Classification (SIC)
code, SBA will assign the appropriate size standard to determine COC
eligibility. SBA determines size eligibility as of the date described
in Sec. 121.404 of this chapter.
(ii) A manufacturing, service, or construction concern must
demonstrate that it will perform a significant portion of the proposed
contract with its own facilities, equipment, and personnel. The
contract must be performed or the end item manufactured within the
United States.
(iii) A non-manufacturer making an offer on a small business set-
aside contract for supplies must furnish end items that have been
manufactured in the United States by a small business. A waiver of this
requirement may be requested under Secs. 121.1301 through 121.1305 of
this chapter for either the type of product being procured or the
specific contract at issue.
(iv) A non-manufacturer making an offer on an unrestricted
procurement or a procurement utilizing simplified acquisition threshold
procedures with a cost that does not exceed $25,000 must furnish end
items manufactured in the United States to be eligible for a COC.
(v) An offeror intending to provide a kit consisting of finished
components or other components provided for a special purpose, is
eligible if:
(A) It meets the Size Standard for the SIC code assigned to the
procurement;
(B) Each component comprising the kit was manufactured in the
United States; and
(C) In the case of a set-aside, each component comprising the kit
was manufactured by a small business under the size standard applicable
to the component provided. A waiver of this requirement may be
requested under Secs. 121.1301 through 121.1305 of this chapter.
(2) SBA will determine a concern ineligible for a COC if the
concern, or any of its principals, appears in the ``Parties Excluded
From Federal Procurement Programs'' section found in the U.S. General
Services Administration Office of Acquisition Policy Publication: List
of Parties Excluded From Federal Procurement or Nonprocurement
Programs. If a principal is unable to presently control the applicant
concern, and appears in the Procurement section of the list due to
matters not directly related to the concern itself, responsibility will
be determined in accordance with paragraph (f)(2) of this section.
(3) An eligibility determination will be made on a case-by-case
basis, where a concern or any of its principals appears in the
Nonprocurement Section of the publication referred to in paragraph
(b)(2) of this section.
[[Page 3314]]
(c) Referral of nonresponsibility determination to SBA. (1) A
contracting officer who determines that an apparently successful
offeror that has certified itself to be a small business with respect
to a specific Government procurement lacks any element of
responsibility (including competency, capability, capacity, credit,
integrity or tenacity or perseverance) must refer the matter in writing
to the SBA Government Contracting Area Office (Area Office) serving the
area in which the headquarters of the offeror is located. The referral
must include a copy of the following:
(i) Solicitation;
(ii) Offer submitted by the concern whose responsibility is at
issue for the procurement (its Best and Final Offer for a negotiated
procurement);
(iii) Abstract of Bids, where applicable, or the Contracting
Officer's Price Negotiation Memorandum;
(iv) Preaward survey, where applicable;
(v) Contracting officer's written determination of
nonresponsibility;
(vi) Technical data package (including drawings, specifications,
and Statement of Work); and
(vii) Any other justification and documentation used to arrive at
the nonresponsibility determination.
(2) Contract award must be withheld by the contracting officer for
a period of 15 working days (or longer if agreed to by SBA and the
contracting officer) following receipt by the appropriate Area Office
of a referral which includes all required documentation.
(3) The COC referral must indicate that the offeror has been found
responsive to the solicitation, and also identify the reasons for the
nonresponsibility determination.
(d) Application for COC. (1) Upon receipt of the contracting
officer's referral, the Area Office will inform the concern of the
contracting officer's negative responsibility determination, and offer
it the opportunity to apply to SBA for a COC by a specified date.
(2) The COC application must include all information and
documentation requested by SBA and any additional information which the
firm believes will demonstrate its ability to perform on the proposed
contract. The application should be returned as soon as possible, but
no later than the date specified by SBA.
(3) Upon receipt of a complete and acceptable application, SBA may
elect to visit the applicant's facility to review its responsibility.
Where a service or construction contract will be performed outside the
United States, SBA will rely solely on documentation and other relevant
information obtained within the United States. SBA personnel may obtain
clarification or confirmation of information provided by the applicant
by directly contacting suppliers, financial institutions, and other
third parties upon whom the applicant's responsibility depends.
(e) Incomplete applications. If an application for a COC is
materially incomplete or is not submitted by the date specified by SBA,
SBA will close the case without issuing a COC and will notify the
contracting officer and the concern with a declination letter.
(f) Reviewing an application. (1) The COC review process is not
limited to the areas of nonresponsibility cited by the contracting
officer. SBA may, at its discretion, independently evaluate the COC
applicant for all elements of responsibility, but it may presume
responsibility exists as to elements other than those cited as
deficient. SBA may deny a COC for reasons of nonresponsibility not
originally cited by the contracting officer.
(2) A small business will be rebuttably presumed nonresponsible if
any of the following circumstances are shown to exist:
(i) Within three years before the application for a COC, the
concern, or any of its principals, has been convicted of an offense or
offenses that would constitute grounds for debarment or suspension
under FAR subpart 9.4 (48 CFR part 9, subpart 9.4), and the matter is
still under the jurisdiction of a court (e.g., the principals of a
concern are incarcerated, on probation or parole, or under a suspended
sentence); or
(ii) Within three years before the application for a COC, the
concern or any of its principals has had a civil judgment entered
against it or them for any reason that would constitute grounds for
debarment or suspension under FAR subpart 9.4 (48 CFR part, subpart
9.4).
(g) Decision by Area Director (``Director''). After reviewing the
information submitted by the applicant and the information gathered by
SBA, the Area Director will make a determination, either final or
recommended as set forth in the following chart:
------------------------------------------------------------------------
SBA official or Finality of
office with decision; options
Contracting actions authority to make for contracting
decision agencies
------------------------------------------------------------------------
$100,000 or less, or in Director may approve Final. The Director
accordance with Simplified or deny. will notify both
Acquisition Threshold applicant and
procedures. contracting agency
in writing of the
decision.
Between $100,000 and $25 (1) Director may (1) Final.
million. deny.
(2) Director may (2) Contracting
approve, subject to agency may proceed
right of appeal and under paragraph (h)
other options. or paragraph (i) of
this section.
Exceeding $25 million....... (1) Director may (1) Final.
deny.
(2) Director must (2) Contracting
refer to SBA agency may proceed
Headquarters under paragraph (j)
recommendation for of this section.
approval.
------------------------------------------------------------------------
(h) Notification of intent to issue on a contract with a value
between $100,000 and $25 million. Where the Director determines that a
COC is warranted, he or she will notify the contracting officer of the
intent to issue a COC, and of the reasons for that decision, prior to
issuing the COC. At the time of notification, the contracting officer
has the following options:
(1) Accept the Director's decision to issue the COC and award the
contract to the concern. The COC issuance letter will then be sent,
including as an attachment a detailed rationale of the decision; or
(2) Ask the Director to suspend the case for one of the following
purposes:
(i) To forward a detailed rationale for the decision to the
contracting officer for review within a specified period of time;
(ii) To afford the contracting officer the opportunity to meet with
the Area Office to review all documentation contained in the case file;
(iii) To submit any information which the contracting officer
believes SBA has not considered (at which time, SBA will establish a
new suspense date mutually
[[Page 3315]]
agreeable to the contracting officer and SBA); or
(iv) To permit resolution of an appeal by the contracting agency to
SBA Headquarters under paragraph (i) of this section.
(i) Appeals of Area Director determinations. For COC actions with a
value exceeding $100,000, contracting agencies may appeal a Director's
decision to issue a COC to SBA Headquarters by filing an appeal with
the Area Office processing the COC application. The Area Office must
honor the request to appeal if the contracting officer agrees to
withhold award until the appeal process is concluded. Without such an
agreement from the contracting officer, the Director must issue the
COC. When such an agreement has been obtained, the Area Office will
immediately forward the case file to SBA Headquarters.
(1) The intent of the appeal procedure is to allow the contracting
agency the opportunity to submit to SBA Headquarters any documentation
which the Area Office may not have considered.
(2) SBA Headquarters will furnish written notice to the Director,
Office of Small and Disadvantaged Business Utilization (OSDBU) at the
secretariat level of the procuring agency (with a copy to the
contracting officer), that the case file has been received and that an
appeal decision may be requested by an authorized official at that
level. If the contracting agency decides to file an appeal, it must
notify SBA Headquarters through its Director, OSDBU, within 10 working
days (or a time period agreed upon by both agencies) of its receipt of
the notice under paragraph (h) of this section. The appeal and any
supporting documentation must be filed within 10 working days (or a
different time period agreed to by both agencies) after SBA receives
the request for a formal appeal.
(3) The SBA Associate Administrator for Government Contracting (AA/
GC) will make a final determination, in writing, to issue or to deny
the COC.
(j) Decision by SBA Headquarters where contract value exceeds $25
million. (1) Prior to taking final action, SBA Headquarters will
contact the contracting agency at the secretariat level or agency
equivalent and afford it the following options:
(i) Ask SBA Headquarters to suspend the case so that the agency can
meet with Headquarters personnel and review all documentation contained
in the case file; or
(ii) Submit to SBA Headquarters for evaluation any information
which the contracting agency believes has not been considered.
(2) After reviewing all available information, the AA/GC will make
a final decision to either issue or deny the COC. If the AA/GC's
decision is to deny the COC, the applicant and contracting agency will
be informed in writing by the Area Office. If the decision is to issue
the COC, a letter certifying the responsibility of the firm will be
sent to the contracting agency by Headquarters and the applicant will
be informed of such issuance by the Area Office. Except as set forth in
paragraph (l) of this section, there can be no further appeal or
reconsideration of the decision of the AA/GC.
(k) Notification of denial of COC. The notification to an
unsuccessful applicant following either an Area Director or a
Headquarters denial of a COC will briefly state all reasons for denial
and inform the applicant that a meeting may be requested with
appropriate SBA personnel to discuss the denial. Upon receipt of a
request for such a meeting, the appropriate SBA personnel will confer
with the applicant and explain the reasons for SBA's action. The
meeting does not constitute an opportunity to rebut the merits of the
SBA's decision to deny the COC, and is for the sole purpose of giving
the applicant the opportunity to correct deficiencies so as to improve
its ability to obtain future contracts either directly or, if
necessary, through the issuance of a COC.
(l) Reconsideration of COC after issuance. (1) An approved COC may
be reconsidered and possibly rescinded, at the sole discretion of SBA,
where an award of the contract has not occurred, and one of the
following circumstances exists:
(i) The COC applicant submitted false or omitted materially adverse
information;
(ii) New materially adverse information has been received relating
to the current responsibility of the applicant concern; or
(iii) The COC has been issued for more than 60 days (in which case
SBA may investigate the firm's current circumstances).
(2) Where SBA reconsiders and reaffirms the COC the procedures
under paragraph (h) of this section do not apply.
(m) Effect of a COC. By the terms of the Act, a COC is conclusive
as to responsibility. Where SBA issues a COC on behalf of a small
business with respect to a particular contract, contracting officers
are required to award the contract without requiring the firm to meet
any other requirement with respect to responsibility.
(n) Effect of Denial of COC. Denial of a COC by SBA does not
preclude a contracting officer from awarding a contract to the referred
firm, nor does it prevent the concern from making an offer on any other
procurement.
(o) Monitoring performance. Once a COC has been issued and a
contract awarded on that basis, SBA may monitor contractor performance.
Sec. 125.6 Prime contractor performance requirements (limitations on
subcontracting).
(a) In order to be awarded a full or partial small business set-
aside contract, an 8(a) contract, or an unrestricted procurement where
a concern has claimed a 10 percent small disadvantaged business (SDB)
price evaluation preference, a small business concern must agree that:
(1) In the case of a contract for services (except construction),
the concern will perform at least 50 percent of the cost of the
contract incurred for personnel with its own employees.
(2) In the case of a contract for supplies or products (other than
procurement from a regular dealer in such supplies or products), the
concern will perform at least 50 percent of the cost of manufacturing
the supplies or products (not including the costs of materials).
(3) In the case of a contract for general construction, the concern
will perform at least 15 percent of the cost of the contract with its
own employees (not including the costs of materials).
(4) In the case of a contract for construction by special trade
contractors, the concern will perform at least 25 percent of the cost
of the contract with its own employees (not including the cost of
materials).
(b) Definitions. The following definitions apply to this section:
(1) Cost of the contract. All allowable direct and indirect costs
allocable to the contract, excluding profit or fees.
(2) Cost of contract performance incurred for personnel. Direct
labor costs and any overhead which has only direct labor as its base,
plus the concern's General and Administrative rate multiplied by the
labor cost.
(3) Cost of manufacturing. Those costs incurred by the firm in the
production of the end item being acquired. These are costs associated
with the manufacturing process, including the direct costs of
fabrication, assembly, or other production activities, and indirect
costs which are allocable and allowable. The cost of materials, as well
as the profit or fee from the contract, are excluded.
(4) Cost of materials. Includes costs of the items purchased,
handling and
[[Page 3316]]
associated shipping costs for the purchased items (which includes raw
materials), off-the-shelf items (and similar proportionately high-cost
common supply items requiring additional manufacturing or incorporation
to become end items), special tooling, special testing equipment, and
construction equipment purchased for and required to perform on the
contract. In the case of a supply contract, the acquisition of services
or products from outside sources following normal commercial practices
within the industry are also included.
(5) Off-the-shelf item. An item produced and placed in stock by a
manufacturer, or stocked by a distributor, before orders or contracts
are received for its sale. The item may be commercial or may be
produced to military or Federal specifications or description. Off-the-
shelf items are also known as Nondevelopmental Items (NDI).
(6) Personnel. Individuals who are ``employees'' under Sec. 121.106
of this chapter.
(7) Subcontracting. That portion of the contract performed by a
firm, other than the concern awarded the contract, under a second
contract, purchase order, or agreement for any parts, supplies,
components, or subassemblies which are not available off-the-shelf, and
which are manufactured in accordance with drawings, specifications, or
designs furnished by the contractor, or by the government as a portion
of the solicitation. Raw castings, forgings, and moldings are
considered as materials, not as subcontracting costs. Where the prime
contractor has been directed by the Government to use any specific
source for parts, supplies, components subassemblies or services, the
costs associated with those purchases will be considered as part of the
cost of materials, not subcontracting costs.
(c) SBA will determine compliance with the Prime Contractor
Performance Requirements as of the following dates:
(1) In a sealed bid procurement, as of the date the bid was
submitted;
(2) In a negotiated procurement, as of the date the concern submits
its best and final offer. If a concern is determined not to be in
compliance at the time it submits its best and final offer, it may not
come into compliance later for that procurement by revising its
subcontracting plan.
(d) Compliance will be considered an element of responsibility and
not a component of size eligibility.
(e) The period of time used to determine compliance will be the
period of performance which the evaluating agency uses to evaluate the
proposal or bid. If the evaluating agency fails to articulate in its
solicitation the period of performance it will use to evaluate the
proposal or bid, the base contract period, excluding options, will be
used to determine compliance. In indefinite quantity contracts,
performance over the guaranteed minimum will be used to determine
compliance unless the evaluating agency articulates a different period
of performance which it will use to evaluate the proposal or bid in its
solicitation.
(f) Work to be performed by subsidiaries or other affiliates of a
concern is not counted as being performed by the concern for purposes
of determining whether the concern will perform the required percentage
of work.
(g) The procedures of Sec. 125.5 apply where the contracting
officer determines non-compliance, the procurement is a full or partial
small business set-aside or an SDB has claimed a preference, and refers
the matter to SBA for a COC determination.
Dated: January 19, 1996.
Philip Lader,
Administrator.
[FR Doc. 96-1157 Filed 1-30-96; 8:45 am]
BILLING CODE 8025-01-P
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